Index

DornbuschFischerStartz: Back Matter Index The McGrawHill
Macroeconomics, Ninth Companies, 2004

Edition
INDEX
A in explanation of Great Depression, lines vs. curves, 114

Absolute convergence, 82 459 long run, 7
Accelerator model of inventory for exports, 323324 neoclassical theory, 539540
investment, 382 formula for equilibrium output, and net investment, 363
Accommodating policies, 136 220221 and price level, 95
Action lag, 185186 and gross investment, 363 in random walk model, 556560
Active policy intervention, 184 impact of money supply, 9597 short run, 9
Activist policy, 195201 inflation and changes in, 8 and short-run Phillips curve, 122
dynamic inconsistency, 203208 and inflation rate, 15 Aggregate supplyAggregate demand
fine tuning, 195198 and interest rate, 246248 model
opposition to, 195 interest rate and composition of, automatic adjustments, 499
rules vs. discretion, 198201 243 basic economic tool, 95
Taylors rule, 200 and money supply, 391 business cycles in, 557558
Actual output, 16 net exports in, 311 classical AD policy, 104106
AD; see Aggregate demand and nonlinear aggregate supply, 100 components, 68
Ad hoc intervention, 532 for output, 22 Keynesian AD policy, 103104
Adjustable rate mortgage, 169, 379n in random walk model, 556560 in long run, 108
Adjusted GNP, 36 and real money supply, 101102 Lucas critique, 546
Adjustment costs, 370371 saving and investment in, 221222 in medium-run model, 910
Adjustments; see Balance-of- short run, 9 in microeconomics, 98
payments deficits; and short-run Phillips curve, 122 and perfect foresight model,
International adjustments Aggregate demand curve, 101103 546547
Adverse supply shocks, 134136 and accommodating policies, 136 and Phillips curve, 10, 11
After-tax income, 157 definition, 7, 95 and random walk model, 541
Agenor, Pierre-Richard, 505n effect of money supply changes, and rational expectations model,
Aggregate demand 272273 544547
component of GDP, 26 in microeconomics, 97 simplified version, 545546
components in open economy, 497498 supply-side economics and, 106108
consumption spending, 2526 origin in Great Depression, 99 Aggregate supply curve
government purchases, 27, and policymakers, 181182 adverse price shocks, 134136
225226 and quantity theory of money, 103 classical, 9899, 104
investment, 28 Aggregate demand policy definition, 7, 95
net exports, 2829 classical case, 104106 employment and wages, 132134
consumption and autonomous and inflation, 15 expectations-augmented, 471, 552
spending, 219 Keynesian case, 103104 favorable price shocks, 138
and consumption function, recession vs. full employment, 100 frictional unemployment, 101
216222 short-term results, 107108 function, 98
consumption percentage of, 335 Aggregate demand schedule, 545 imperfect information model,
definition, 7, 215 deriving, 261263 552555
effect of exchange rates, 320323 equation, 263264 imperfections in theory, 112
effect of fiscal expansion, 324325 monetary policy for, 138 Keynesian, 98, 99101
effect of multiplier, 222225 Aggregate demand shocks, in random long run, 78
equation, 222 walk model, 556560 medium run, 10
for equilibrium income and output, Aggregate supply in microeconomics, 97
219220 definition, 7 natural rate of unemployment, 101
and equilibrium output, 215 and investment, 384386 from Phillips curve to, 131134
Edition
594 INDEX
Aggregate supply curve, continued Balanced budget multiplier, 233 Banque de France, 302
and policymakers, 181182 Balance of payments Barro, Robert J., 3, 54n, 77n, 8283,
price adjustment mechanism, capital account, 301 164n, 203n, 349353, 352n,
112115 and capital flows, 315 472, 551n
price-output relations along, 112 current account, 300301 Barro-Ricardo equivalence
in short run, 89, 116 definition, 300 proposition, 349352
and supply shocks, 134138 external accounts, 301302 formal demonstration, 352353
wage adjustments, 130 external balance, 315316 theoretical objections to, 352
Aggregate supply shocks, 97 with flexible exchange rates, 322 Barter economy, 394396
transitory or permanent, 137 internal balance, 316 Bartley, Robert, 505
Aiyagari, S. Rao, 542n simple rule for, 300 Base wage, 129130
Akerlof, George A., 128n, 151n, 171, Balance-of-payments crises, 506 Baumol, William, 387n
541n, 564, 566 Balance-of-payments deficits, 302, Baumol-Tobin model, 398399,
Akhtar, M. A., 416n 498, 512 409410
Alesina, Albert, 172n, 173n adjustments under flexible Bayoumi, Tamin, 510n
Altonji, Joseph G., 127n, 352n, 562n exchange rates, 515521 Bean, Charles, 159n
American Economic Association, 18 automatic adjustment, 499 Beer, C., 36n
American Express, 392 automatic adjustment mechanisms, Beggar-thy-neighbor policy,
Anticipated inventory investment, 596 327328, 457
382383 and budget deficit, 501 Bnassy, Jean-Pascal, 544n
Anticipatory monetary policy, 294 central bank role, 502 Bernanke, Ben S., 3, 202n, 275,
Apprenticeship system, in Europe, crawling peg exchange rate, 502 278n, 376n, 427428, 429,
157 devaluation to end, 501502 460n, 461n
Arbitrage, 425 and dollar bubble, 528529 Bernheim, Douglas, 351n
exchange rates and interest rates, exchange rate expectations, Besley, Timothy, 347n
446447 521524 Beveridge, Stephen, 556n
and interest rates, 437 exchange rates and relative price Bhandari, Jagdeep, 505n
and present value, 440 adjustments, 509 Bils, Mark, 4041, 127n
Argentina, 470 financing and adjustment, 498 Birth rates, 85
hyperinflation, 469, 533 with gold standard, 432 Black Monday, 456
monetary policy, 533 interest differentials, 521524 Black Tuesday, 456
official reserves, 533 monetary approach, 512515 Black unemployment, 149, 150
AS; see Aggregate supply monetary approach to, 512515 Blanchard, Olivier, 3, 156n, 158n,
Asian economic crisis, 496, 531 policies to restore balance, 351n, 499n
Asian Tigers, 8788 499502 Blank, Rebecca, 167n
Aspe, Pedro, 504 relative prices and trade balance, Blejer, Mario, 469n, 482n
Asset/liability positions, 166167 509511 Blinder, Alan S., 165, 167n, 190n,
Assets role of prices in open economy, 206n, 471n, 475n
financial, 391392 496498 Blue Chip forecast, 190
liquid, 392 Balance-of-payments equation, 523 Bolivia, hyperinflation, 467, 468469
portfolio, 400 Balance-of-payments surplus, Bond market, linked to stock
Auerbach, A., 228n 301302, 315 market, 445
Austria, hyperinflation, 467n Balance-of-payments target, 513 Bonds
Automatic adjustment, 499 Baldwin, Richard, 511n coupon, 439
suspended by sterilization, 512 Ball, Laurence M., 118n, 146, 401n, face value, 439
Automatic adjustment mechanisms, 473, 564n foreign, 523
496, 501502, 512 Bangladesh, 8384 indexed, 169
gold standard, 432 investment ratio and schooling, 60 maturities, 435
Automatic stabilizers population growth, 89 in open market operations, 270272
definition, 227 Bankers acceptance, 393 prices and yields, 438441
income tax, 186187, 227228 Bank failures, 415, 454455 term premium, 437
multiplier, 187 Bank loans, and money multiplier, Borrowing
unemployment benefits, 187, 228 422 costs of, 420
Autonomous spending Bank of Japan, 303304, 519 versus equities, 369
and aggregate demand, 219 Bank reserves, 416 and nominal interest, 368
and consumption, 219, 221 Bank runs, 415 Boschen, John, 551n
effect of transfer payments, 229 Banks Boskin, Michael J., 36n, 349n
in investment, 246, 246n credit crunch, 429 Bradley, Michael D., 201n
and multiplier, 222225 credit rationing, 376 Brainard, William, 193
and shift in IS curve, 260261 deposit insurance, 415 Brayton, F., 190
fractional reserve system, 413 Brazil, 470
B kinds of monetary holdings, hyperinflation, 469
Baba, Yoshihisa, 394n 392393 Bresnahan, Timothy F., 37, 89n
Bads, 36 NOW accounts, 394 Bretton Woods system, 519,
Bagehot, Walter, 419 reluctance to lend, 274278, 375 524525, 530
Baker, Michael, 152n transmission mechanism, 278 British pound, devaluation, 303
Edition
INDEX 595
Brown, E. Cary, 233n, 454, 455 internal sources, 373377 to investment, 370373
Brunner, Karl, 453n, 465 share of GDP, 373374 and stock market, 369370
Bruno, Michael, 164n, 171n, 469n, sources of funds, 374375 and taxes, 366367
473 timing of, 373377 in endogenous growth model, 79
Bryant, Ralph C., 527n Business saving, 354 golden-rule, 88
Budget constraint, 217 Business sector, 28n of government, 363
government, 474 investment flows, 362
lifetime, 344 C and marginal product of
Budget deficit, 3234, 230232 Cagan, Philip, 403, 465, 467n capital, 366
Barro-Ricardo equivalence Cairncross, Alec, 458n Card, David, 172n, 562n
proposition, 349353 Calibration techniques, 560 Cardoso, Eliana, 478n
and burden of national debt, Calvo, Guillermo A., 131n Carroll, Christopher, 347348
483484 Campbell, John Y., 346, 349n Carter administration, 288
and external deficit, 501 Canada Case, Anne, 347n
facts and issues, 480487 economic data sources, 46 Case, Karl E., 348n
Fed reaction to, 475, 476 output per worker, 6465 Cash holdings, 395
financing, 421422 real exchange rate, 520 Cecchetti, Stephan G., 130n, 144
in Germany, 294295 stock prices, 441442 Central banks
government outlays, 480481 unit labor costs, 521 ad hoc intervention, 532
and government receipts, 481 working age/retirement age clean floating, 304305
and hyperinflation, 467470 population, 488 credit rationing, 376
inflation-adjusted, 470 Canadian dollar, 446447 financing budget deficits, 422
inflation tax, 474480 Capie, Forrest H., 467n with fixed exchange rates, 302303
measuring Capital with flexible exchange rates,
government assets, 481482 depreciation of, 23, 363 303305, 322, 326
interest payments vs. primary doubling amount of, 7981 foreign exchange intervention,
deficit, 482483 external returns, 81 525526
monetizing, 283284, 474475 and growth, 55 foreign exchange market
money growth and, 474480 investment demand for, 361362 intervention, 303
in recession of 1990 91, 292 long-run level of, 6768 independence of, 205206
Budget surplus, 230231 opportunity cost of, 365 managed float, 304305
definition, 231 private vs. social returns on, 81 money supply control, 255
effects of government purchases, replacement cost, 369370 and perfect capital mobility,
232233 saving and growth in, 6364 317318
effects of taxation, 232233 steady-state values, 63 reserves, 303
full-employment, 233235 stock demand for, 364373 sterilization operations, 512
Buffer-stock saving, 347348 stock market and cost of, 369370 Certainty-equivalence policy, 194
Bundesbank, 293295, 302, 321 Capital account, 314315 Certificates of deposit, 393394
independence of, 206 components, 301 Chain-weighted estimates of real
Bureau of Economic Analysis, 46 definition, 301 GDP, 37n
Burns, Arthur, 206 Capital flows, 315, 365, 522 Chari, V. V., 164n, 203n
Bush, George H. W., 106 and foreign exchange intervention, Chauvet, Marcelle, 438n
Bush, George W., 292293 525 Cheasty, Adrienne, 482n
Bush administration (first), 161n governance, 523 Checkable deposits, 392
Bush administration (second), 185 speculative, 523524 Chen, Daniel, 85n
Business cycles; see also Great Capital gains, 369370 Chinn, Menzie, 201n
depression; Political business Capital-labor ratio, 56, 65 Chrystal, K. Alec, 172n
cycle theory; Real business in growth process, 6566 Classical adjustment process, 499
cycle theory; Recession(s) Capital market integration, 314 Classical AS curve, 98101, 104
in AS-AD model, 557558 Capital markets; see Financial Classical economics
definition, 14 markets aggregate demand policy, 104106
and inflation, 1517 Capital mobility, 313317; see also and crowding out, 281284
inventories in, 383384 Perfect capital mobility for monetary policy, 278279
and investment spending, 371 balance of payments/capital flows, time frame in, 105
money stock and inflation in, 315 Classical quantity theory of money,
461466 and investment flows, 318 405406
output gap, 1415 Mundell-Fleming model, 317320 Clean float, 304305, 502
random walk model, 556560 policy dilemmas, 315317 Cobb-Douglas production function,
and shifts in autonomous spending, Capital stock, 1114, 12 54n
227228 adjustment, 371373 constant returns to scale, 75
swings, 95 definition, 362 and demand for capital, 369
synchronized, 327 desired formula, 55, 62n, 368
Business fixed investment, 361362 effects of fiscal and monetary with labor-augmenting techniques,
credit rationing and, 373377 policies, 367369 71
discounted cash flow analysis, versus existing stock, 370371 Cochrane, John H., 556n
377378 and expected output, 365366 Cohen, Darrel, 235n
Edition
596 INDEX
Cohn, Richard, 167n Consumption-in-time relation, 338 Currency-deposit ratio, 414, 415
Cold-turkey policies, 188 Consumption-leisure tradeoff, 562 Currency depreciation, 306307
Collective bargaining agreements, Consumption spending, 2526 and change in money stock, 326
170; see also Labor contracts Consumption theory competitive, 326327
Commercial paper, 393 central point of, 335 expected, 523, 524
Competitive depreciation, 326327 disagreements about, 341 impact of, 313
Competitive economy, 7475 Keynesian theory, 337 and monetary approach to balance
Competitiveness, effect of exchange life-cycle hypothesis, 339342 of payments, 514515
rates, 521 life-cyclepermanent-income Currency devaluation; see
Compound interest, 437 hypothesis, 344348 Devaluation
Computer prices, 137 permanent-income hypothesis, Currency revaluation, 307
Conditional convergence, 8283 342343 Current account
Congressional Budget Office, 155, random walk model, 345 definition, 300301
156n, 162, 190 and tax policy, 338 J-curve effect, 511
Conservatives, on policy mix, Contractionary policy, 196197 percentage of GDP, 529
287288 Convergence, 5657 Current account deficit, 301302,
Consols, 441 in endogenous growth model, 321, 498
Constant dollars, 37 8283 adjusting, 499506
Constant-growth-rate rule, 198199 Cooper, Russell, 371n and dollar bubble, 528529
Constant marginal product of capital, Coordination approach, 127128 unsustainable, 528529
79 Corn economy, 222 Current consumption, 337
Constant returns to scale, 75, 7981 Corporate income tax, 366 Current dollars, 37
Consumer confidence, 101 Cost of capital Current output, 35
Consumer price index, 15 in investment decision, 375 Cyclically adjusted surplus, 234
indexing wages to, 170 replacement, 369370 Cyclical unemployment, 151
overstating inflation, 4041 and stock market, 369370 costs of, 161162
purpose, 4042 Cost of holding money, 253254 distributional effect, 162
Consumption Cost-of-living adjustments, 170
and aggregate demand, 219 Countercyclical fiscal policy, 459 D
and autonomous spending, 221 Coupon, 439 Danziger, Sheldon, 167n
Barro-Ricardo equivalence Crawling peg, 507 Darby, Michael, 453n, 454
proposition, 349353 Credibility, 189190, 473 Darity, William, 145n
and buffer-stock saving, 347348 Credibility bonus, 471472 Davies, Glyn, 396n
current vs. lagged, 337 Credible policy, 471472 Debt, indexed, 169
and demography, 340 Credit; see also Domestic credit Debt-income ratio, 484, 485
and disposable income, 218, 219 money and interest rates, 427429 Debtors, effect of inflation, 167
of durable goods, 336n, 342 in recession of 199091, 428429 Decision lag, 185186
excess sensitivity, 345346 Credit controls, 376 Decision making
excess smoothness, 345346 Credit crunch, 429 dynamic programming, 207
Fisher diagram, 350 Creditors, effect of inflation, 167 effect of inflation, 164
income relationship, 218 Credit rationing, 373377 Deep parameters, 562
individual demands, 216n definition, 374, 376, 429 Deflator, 39
international differences on saving reasons for, 376 DeJuan, Joseph, 346n
rates, 353355 Credit system, illiquid, 419 De Long, J. Bradford, 206, 453n
linked to income, 335337 Credit targets, 427 Demand deposits, 392
liquidity constraint, 346347 Croushore, Dean, 123n, 471n Demand for capital, 361362
and myopia, 346347 Crowding out and Cobb-Douglas production
percentage of aggregate demand, and classical case, 281284 function, 369
335 definition, 280281 theory of investment, 361362
and saving, 216217, 339 effect of fiscal policy, 279284 Demand for labor, 129130
saving and interest rates and, 349 importance of, 283284 and frequency of unemployment,
share of GDP, 26 Currencies, 392 153
spending on domestic goods, hysteresis effects of overvaluation, Demand for money
310311 511 Baumol-Tobin model, 398399,
steady-state, 88 in money supply, 413 409410
and stock market, 348 pegged to dollar, 531 definition, 391
under uncertainty, 344345 and purchasing power parity, effect on interest, 260
Consumption function 308310 empirical evidence, 400404
and aggregate demand, 216222 Currency account lagged adjustment in interest
definition, 216 J-curve effect, 511 rate, 401
equation, 335 and relative prices, 508 M1 demand, 401402
with government sector, 226 Currency appreciation, 306307 M2 demand, 402404
income assumption, 339 from fiscal expansion, 529530 essential properties, 402
intercept, 216 and foreign exchange intervention, and high inflation, 403
and savings function, 217 525526 and income elasticity, 401
slope, 216 Currency boards, 512n, 532533 during inflation, 461
Edition
INDEX 597
and interest elasticity, 400 Distributed lag, 187188 Economic depreciation, 363
and monetary approach to balance Distributional consequences of Economic efficiency, of Social
of payments, 513 unemployment, 145146, 162 Security, 489
and money supply changes, Distributional costs of inflation, 146 Economic forecast, 546
271272 Disturbances Economic models
real vs. nominal, 253254, 396 adjustment to, 323324 definition, 189
theories, 396400 duration, 183185, 198 definition and purpose, 1213
benefits vs. interest costs, 397 forecasting, 190191 Lucass view, 125
in Keynesian economics, 397 monetary or nonmonetary, 520 of macroeconomics, 411
precautionary motive, 397, 399 policy regime change and, uncertainty about, 191192
speculative demand, 397, 189190 validity, 190191
399400 in real business cycle theory, 543 Economic parameters, 560, 562
transactions demand, 397399 recognition lag, 185 Economic policy; see also Aggregate
Demand for real money balances, Dixit, Avinash K., 377n demand policy; Growth
253254 Dixon, Huw D., 544n policy; Policies/policy
Demand management policies, 100; Dollar in Germany 199092, 293295
see also Aggregate demand constant vs. current, 3738 in Great Depression, 454456
policy currency pegged to, 303n and Phillips curve, 204
Democracy, and central bank drop in purchasing power and uncertainty, 191194
independence, 206 19722002, 164165 in United States in 1980s,
Demography, and consumption, 340 exchange rate with yen, 306 288290
Deposit insurance, 415 fluctuating value of, 95 Economic Report of the President, 46
Depreciation; see also Currency and GDP deflator, 3940 Economic variables, 194195
depreciation impact of depreciation, 313 Economies of scale in money
in GDP, 23 in international trade, 299 management, 399
and investment, 363 in nominal GDP, 103 Economist, 18
and rental cost of capital, 365 overvaluation, 511 Economy
Desired capital stock, 365373 price levels in U.S. and Mexico, barter, 394396
Destabilization, 184 508 benefits of inflation, 171172
Deuker, Michael, 438n and real exchange rate, 308 big picture view of, 95
Devaluation, 306307 Dollar appreciation duration of disturbances,
British pound, 303 in 1980s, 519, 526527 183185
definition, 501 Dollar bubble, 528529 in equilibrium, 219220
delay of, 400 Dollarization, 531, 532533 escape from low-level equilibrium,
real, 503505 Domestic credit, 513514 86
to restore trade balance, 501502, ceiling, 513514 fluctuations in, 5
509 curtailing, 514 with hyperinflation, 466467
Developed countries, 56 Domestic goods, 310311 impact of tax cuts, 106108
Developing countries, 56 Domestic spending, 310311 with imperfectly anticipated
Devereux, Paul J., 127n Dow Jones Industrial Average, and inflation, 164168
Diamond, Douglas, 415 crash of 1929, 456 inherent instability, 464465
Diamond, Peter A., 396n, 490n Downsizing, 154 international linkages, 299300
Dickens, William T., 171 Drazen, Allan, 173n Japan-U.S. convergence,
Difference stationary variable, 557 Driver, R., 532 5657
Diminishing marginal product of Durable goods, 28 macroeconomic behavior, 3
capital, 79, 365 Durable goods consumption, manageable essentials, 3
Direction of exchange rates, 307 336n, 342 with perfectly anticipated inflation,
Dirty float, 305, 502, 525526 Duration of unemployment, 151152, 163164
Discounted cash flow analysis, 152153, 154 in poverty trap, 8586
377378 Dwyer, Gerald, 475n price adjustment mechanism,
Discount rate, 418420 Dybvig, Philip, 415 112115
changes in, 421 Dynamic behavior, 373 protection from resource-depletion
in United States 20002002, 412 Dynamic inconsistency disasters, 89
Discouraged workers, 147n, 149 and central bank independence, recovery of 1990s, 154
Discrete lag, 187 205206 role of money, 240
Discretionary government spending, formal approach, 207208 simple, 3031
480 and rules vs. discretion, 203208 steady-state, 63
Disinflation, 146 Dynamic programming, 207 steady-state equilibrium, 61
Reagan-Volcker, 473 Dynamic scoring, 107 Edison, Thomas A., 37
and sacrifice ratio, 472474 Dynan, Karen E., 342n, 348n Educational attainment, 60
in United States, 471 Efficiency wage theory, 128, 130
Disintermediation, 415 E Ehrenberg, R., 158
Disposable income, 3132, 216n East Asian growth, 8788 Ehrlichman, John, 206
changes in, 335336 Easterly, William, 90n, 164n, 167n Eichengreen, Barry, 458n, 531n
and consumption, 218, 219 Economagic.com, 19, 46 Eisner, Robert, 36, 363, 482
definition, 226 Economic data, 46 Employed person, 147148
Edition
598 INDEX
Employers unemployment benefits, 157160 Expectations-augmented aggregate

experience rating, 160 unemployment rate, 156, 158, 159 supply curve, 471, 552
reaction to long-term European Central Bank, 293n, 305, Expectations formation, 554
unemployment, 156 474n Expectations theory of term
Employment, in aggregate supply independence of, 206 structure, 437, 438
curve, 132134 European Monetary System, 190 Expected inflation rate, 365
Employment stability, 160 European Monetary Union, 304305 Expected real interest rate, 365
Endogenous growth model, 61; European Union Expenditure-reducing policies,
see also Growth theory economic data sources, 46 499506
Endogenous money stock, 320 economic integration, 304305 Expenditure-switching policies,
Endogenous population growth, Maastricht criteria, 305, 474n 499506
8586 Excess reserves, 416 Experience rating, 160
Ends of Four Big Inflations Exchange rate appreciation, 524 Export revenue loss, 502
(Sargent), 473 Exchange rate expectations External accounts, 301302
Engel, Charles, 308n, 309n definition, 522523 External balance, 315316, 500
Entitlement programs, 480 and interest differentials, 521524 Mexico, 504505
Environmental protection, 89 speculative capital flows, 523524 External competitiveness, 521
Equate-expected-marginal utilities Exchange rate floating, 525526
rule, 344345 Exchange rate fluctuations F
Equilibrium and interdependence, 524531 Face value, 439
goods market, 101, 102103, 242, and intervention, 525527 Factor payments, 2223
255257, 263264, 269261 Exchange rate overshooting, 517519 in GNP, 23
labor market, 98 Exchange rate regimes to labor, 25
money market, 101, 102103, 242, ad hoc intervention, 532 percentage of net domestic
255257, 263264, 269261 choice of, 531533 product, 2425
saving and investment, 221222 currency boards, 532533 Factors of production, 12
Equilibrium exchange rate, 520, dollarization, 532533 effect of changes on output, 61
531532 target zones, 531532 during expansions, 15
Equilibrium income, 246249 Exchange rates, 4546; see also human capital, 5961
and autonomous spending, Fixed exchange rates; increasing returns to scale, 81
222225 Flexible exchange rates; natural resources, 59
change in, 260261 Foreign exchange market, payments to, 2223
effect of foreign income, 312 intervention in to produce new capital, 370371
effects of change in fiscal policy, and capital mobility, 314 shift factors, 98
228229 central bank intervention, 303 Fair, Ray, 173n
effects of government sector, changes and trade adjustments, Fazzari, Steven M., 375
225227 508511 Fed balance sheet, 417
equation, 263 clean float, 304305, 502 Federal Deposit Insurance
in fiscal expansion, 279280 competitive depreciation, 326327 Corporation, 415, 419, 457
and fiscal policy multiplier, crawling peg, 507 Federal funds rate, 294, 412, 420, 522
264265 currency boards, 512n and crash of 1929, 456
with government sector, 227 direction of, 307 Federal Open Market Committee,
and interest rate, 263264 dirty float, 502, 525526 185, 426
and monetary policy multiplier, effect on aggregate demand, Federal Reserve Bank of New York,
265 320323 186
and multiplier, 222225 effects on competitiveness, 521522 Federal Reserve System, 189, 241,
Equilibrium income and output, and interest rates, 446447 394, 412
219220 in long run, 307310 anticipatory monetary policy, 294
Equilibrium interest rate managed float, 305 control of interest rate, 423424
change in, 260261 pegged, 303n control of money stock, 423424
equation, 264 as policy instrument, 502 control over high-powered money,
and IS/LM curves, 259261 policy synchronization, 530 413
Equilibrium output, 546 and prices, 503505 credit controls, 376
and aggregate demand, 215 and purchasing power parity, credit targets, 427429
under flexible exchange rates, 325 308310, 519520 decision lag, 185
formula for, 220221 and relative price adjustment, 509 dilemma in monetizing deficit,
Equilibrium price, 546 repercussion effects, 313 474475
Equilibrium real business cycle terminology, 306307 discount rate changes, 421
theory, 560 Exogenous technological change, gold holdings, 418n
Equity investment, 369370 6971 in Great Depression, 455, 460
Euro, 304305 Expansion, 15, 291292 independence of, 206
Eurodollars, 393 Expansionary fiscal policy, 102, intermediate targets, 430
Europe 243, 290 interest rate targets, 424427
apprenticeship system, 157 Expansionary monetary policy, 101, lender of last resort, 419
inflexible labor markets, 159 102 making Argentinas monetary
labor unions, 159160 Expansionary policies, 196197 policy, 533
Edition
INDEX 599
monetary policy 1980s90s, effect on aggregate demand, perfect capital mobility under,
196197 324325 317320
monetizing budget deficit, 283 effect on income and interest rate, and rate of return, 318
money creation, 271272 279280 role of exchange rate in, 502
money stock targets, 424427 under fixed exchange rates, 320 Fixed productive capacity, 4, 68
money supply control, 255 and full crowding out, 282283 Fixed Reproducible Tangible Wealth
open market desk, 423424 monetary policy during, in the United States, 28n
open market operations, 270272 283284 Flavin, Marjorie, 345n, 347n
pegging interest rate, 276277 in united Germany, 321 Fleming, Marcus, 317
policy tools in United States, 327 Flexible exchange rates, 303305
discount rate, 418420 Fiscal policy adjustments under
Fed balance sheet, 417418 accommodating, 136 to change in money stock,
Fed funds rate, 420 action lag, 185186 325326
financing budget deficits, capital account, 314315 exchange rate overshooting,
421422 in classical case, 279 517519
foreign exchange intervention, countercyclical, 459 external competitiveness, 521
418 and crowding out, 279284 monetary expansion, 516517
open market purchases, 416417 decision lag, 185186 process, 515516
reserve ratio, 421 definition, 226 purchasing power parity,
reaction to deficits, 475, 476 effect of changes in budget, 519521
in recession of 199091, 291, 292, 232233 to real disturbances, 323324
428429 effect on rental cost of capital, interdependence effects, 527530
response to weakening economy, 367369 in monetarism, 465
269 effects of change in, 228229 perfect capital mobility under,
speed of action, 186 for fine tuning, 194198 320327
survey on cash holdings, 395 and full-employment budget Flight out of money, 403
target options, 430 surplus, 233235 Floating exchange rates, 4546,
ultimate targets, 430 in Germany 199092, 293295 304305, 525; see also
Feedberg, D., 228n in Great Depression, 455457 Flexible exchange rates
Feldstein, Martin, 3, 157n heterodox programs, 468 Floating rate loan, 169
Female unemployment, 149, 150 and high-employment surplus, Flood, Robert, 505n
Fender, John, 471n 234235 Fluctuations; see also Business
Final goods, 35 increase in government spending, cycles; Disturbances
Finance, 299 279284 in economy, 5
Financial assets, 391392 lags in, 188 and multiplier, 224
Financial innovation, 394, 402 and liquidity trap, 281 in output, 8, 541543
Financial intermediation, 427428 overseas effect, 528529 in random walk model, 541
Financial markets in policy mix, 284288 in real output, 215
arbitrage in, 425 in portfolio of policy instruments, Forecast errors, 548, 549
bond prices and yields, 438441 192 Forecasts
exchange rates and interest rates, purpose, 269 Blue Chip, 190
446447 in recession of 199091, 290291, validity of, 190191
function, 435 428429 Foreign exchange market
inflation expectations, 403 rules vs. discretion, 198201 daily turnover, 299
interest rates, 435441 side effects, 199 intervention in, 418
and random walk of stock prices, temporary investment tax credit, ad hoc, 532
441445 370 definition, 525
and yield curve, 428, 439 Fiscal policy multiplier, 264265 reasons for, 525526
Financing balance-of-payments Fischer, Stanley, 164n, 167n, 202n, sterilization operations, 512
deficits, 498 467n sterilized or nonsterilized,
Fine tuning, 195198 Fisher diagram, 350 526527
side effects, 199 Fisher relationship, 523 Foreign trade, 3134
Firms Fixed exchange rates, 4546, Foundations of Economic Analysis
borrowing vs. equity, 369 302303 (Samuelson), 83
capital stock adjustment, 371373 automatic adjustment with, 499 Fractional reserve baking, 413
costs and prices, 132 delay of devaluation, 500 France
and credit rationing, 373377 endogenous money stock, 320 unemployment rate, 42
in long-term labor contracts, external and internal balance working age/retirement age
128130 under, 316 population, 488
reasons for holding inventories, financing adjustments, 498 Frankel, Jeffrey A., 201n, 309n,
381 fiscal expansion under, 320 521n, 529
setting and changing prices, 564 international adjustments with, Frenkel, Jacob A., 513n, 530n, 531n
sources of funds, 374375 496508 Frequency of unemployment,
Fiscal expansion intervention in, 303 152153
and currency appreciation, monetary expansion under, Frictional unemployment, 101,
529530 319320 149151
Edition
600 INDEX
Friedman, Benjamin M., 194195, Ghana, GDP, 5354, 7778 Government saving, 354
376n, 401n, 427, 428n, 430n Globalization, 299 Government sector, 225230
Friedman, Milton, 3, 16n, 127, 195, GNP; see Gross national product effects of change in fiscal policy,
341, 342, 403, 419, 453n, 454, Goffe, Bill, 18 228229
455n, 460, 461n, 464465, Golden rule level of saving, 88 effects on equilibrium income,
467n, 472, 494, 525n Goldfeld, Stephen, 401n 225227
Froot, Kenneth A., 309, 529 Gold holdings, 418n income tax as automatic stabilizer,
Full employment, 119 Goldsmith, Arthur, 145n 227228
in classical AS curve, 9899 Gold standard, 432 income tax multiplier, 227
concept, 1415 Goldstein, Morris, 530n Gradualist policies, 188
and crowding out, 283284 Goodhart, Charles A. E., 185186 Gramlich, Edward, 490n
determinants of natural rate, Goods and services Grand Coulee Dam, 482
152153 aggregate demand for, 215 Great Depression, 160
estimates of natural rate, 153156 in consumer price index, 4042 bank failures, 415, 454455
frequency of unemployment, 153 consumption spending, 2526 description of, 95, 453458
hysteresis and rising natural rate, domestic spending on, 310311 economic policy, 454457
153156 government purchases, 27 institutional changes, 458
meaning of, 234 net exports, 2829 international aspects, 457458
and natural rate of unemployment, quality improvements, 36 economic statistics, 454
101 Goods market government expenditures and
policies to create, 499 equation, 242, 263 revenues, 455
policy mix for, 285287 equilibrium, 311313 issues and ideas from, 458460
reducing natural rate, 157 equilibrium in, 101, 102103, Keynesian explanation, 459460
transitory deviations, 540541 259261 monetarist challenge, 460
unemployment benefits and, 157 equilibrium schedule, 244, 248 synthesis, 460461
and wage stickiness, 126127 and IS curve, 244252 origin of Keynesian aggregate
Full-employment budget deficit, 234, Gordon, David B., 203n supply curve, 99
235 Gordon, Robert J., 37, 41, 89n, 156, Greenspan, Alan, 196197, 292, 412,
Full-employment budget surplus, 544n 419
233235 Gourinchas, Pierre-Olivier, 348n Grilli, Vittorio, 206n
Full-employment deficit, in recession Government, 3134 Gross, David B., 347n
of 199091, 292 Government assets, 481482 Gross, Herschel, 551n
Full-employment output, 15 Government bonds, Barro-Ricardo Gross domestic private investment, 28
Fundamental national income equivalence proposition, Gross Domestic Product; see also
accounting identity, 25 349352 National income accounting;
Funke, Norbert, 500 Government budget; see also Budget Nominal GDP; Real GDP
Future value, 440 deficit; Budget surplus actual and potential, 558
deficits and surplus, 230235 and average years of schooling, 60
G effects of government and components of demand, 26
Gali, Jordi, 542n purchases/taxation, 232233 composition of, 24
Gallup poll, 173 full-employment surplus, 233235 costs of unemployment, 145
Gallup Report, 143 on-budget/off-budget items, 231 current account percentage of, 529
Galor, Oded, 85n Government budget constraint, 474 data sources, 46
Gavin, William T., 202n Government capital stock, 363 definition, 22
GDP; see Gross Domestic Product Government expenditures, 27 federal debt as percentage of, 34
GDP deflator, 462 Barro-Ricardo equivalence in Germany 198992, 295
and consumer price index, 4041 proposition, 349353 of Ghana, 7778
definition, 39 components, 481 government purchases share of, 27
indexing wages to, 170 discretionary, 480 government revenues share
Geanakoplos, John, 490n effect of increase in, 279284 of, 481
General Motors, 28 during Great Depression, 455 government spending percentage
General Theory of Employment, and liquidity trap, 281 of, 486
Interest and Money (Keynes), mandatory, 480 and GDP, 23
458459 percentage of GDP, 486 growth estimates, 5758
Generational accounting, 485 shocks to, 543 and growth rate, 1114
Germany size-of-government debate, inflation and price indexes, 3738
in Great Depression, 458 486487 investment percentage of,
hyperinflation, 403, 467 Government investment, 363 373374
money market rate, 522 Government outlays, 480481 and level of inventory
policy mix 199092, 293295 Government purchases, 481 investment, 382
unification and external problems, component of AD, 27, 225226 loss in recession of 20012002,
321 effects on budget surplus, 232233 162
unit labor costs, 521 Government revenues measuring
working age/retirement age in Great Depression, 455 current output, 35
population, 488 share of GDP, 481 final goods and vale added, 35
Gertler, Mark, 376n, 427 sources, 475480, 481 problems with, 3536
Edition
INDEX 601
national comparisons 18202000, national comparisons, Hooke, Robert, 83

5354 1214, 78 Hooper, P., 508n
national debt percentage of, 484 national differences, 56 Household cash holdings, 395
and net domestic product, 23 of total factor productivity, 55 Housing
price indexes, 3942 Growth theory, 46 demand for, 364, 378
and production function, 2223 endogenous model, 61, 7784 impact of inflation, 168170
random walk model, 541, 556560 convergence, 8283 owner-occupied homes, 364
in recession of 199091, 292 deeper economics of, 7982 residential investment, 378380
relation of investment ratio, 60 external returns to capital, 81 Hubbard, R. Glenn, 375
relationship of private investment, mechanics of, 7880 Human capital, 28
361362 versus Solow model, 7880 factor in growth, 5961
residential investment share, 379 growth traps, 8384 investment in, 363
saving as percentage of, 355 and long-run models, 7 and long-run growth, 81
with stabilization policy, 184 neoclassical model, 6171 national comparisons, 6465
and total transactions, 404n absolute convergence, 82 in poor countries, 89
trade as percentage of, 299 dissatisfaction with, 77 Hungary, hyperinflation, 467n
transfer payments and, 27 exogenous technological change, Hyperinflation, 466472
of United States in 2000, 22 6971 in Argentina, 533
Gross Domestic Product gap, 113, 133 growth process, 6566 in Austria, 467n
Gross investment, 28, 363 increase in saving rate, 6669 in Bolivia, 467, 468469
Gross national product investment and saving, 6364 and budget deficit, 467470
collapse in Great Depression, 453 key to understanding, 65 definition, 466
effects of fiscal/monetary population growth, 69 and disinflation, 472474
expansion, 326327 simplifying assumption, 61 in Germany, 403, 467
and Gross Domestic Product, 23 steady state, 63 in Hungary, 467n
national debt percentage of, 484 steps, 6163 and monetarism, 472473
Group of Five, 526 purpose, 53 recent experiences, 466
Growth Solow growth model, 7880 stopping, 470
in Asian Tigers, 8788 two-sector models, 8384 Hyslop, Dean, 172n
continued vs. steady-state, 84 Growth traps, 8384 Hysteresis
correlated across countries, 77 Gyohten, Toyoo, 525n effects of overvaluation, 511
empirical estimates, 5758 unemployment, 156
with exogenous technological H
change, 6971 Haberler, Gottfried, 457n I
factors other than capital and labor Hafer, R. W., 402n IBM, 3
human capital, 5961 Hahn, Frank H., 376n, 401n, 430n Identities, economic, 3034
natural resources, 59 Hall, Robert E., 3, 6465, 90, 151n, Illiquid credit system, 419
and GDP, 1114 291n, 345, 346n, 473 Imperfect competition, 454, 563
limits to, 89 Haltiwanger, John, 371n Imperfect information aggregate
national comparisons 18202000, Hanes, Christopher, 128n supply curve model,
5354 Hanke, Steve, 512n 552555
and national debt, 484485 Haquee, Nadeem, 513n Imperfect information on price
no-growth vs. high growth, 8384 Hayashi, Fumio, 352n changes, 127
slowed by high inflation, 164n Helpman, E., 469n Imperfectly anticipated inflation
Growth accounting, 5457 Helwege, Ann, 478n and efficient decision making, 164
equation, 5455 Hendry, David, 394n in short- and long-run, 166
Japan-U.S. convergence, 5657 Henen, Peter, 508n wealth distribution, 164168
national comparisons, 6465 Heston, Alan, 77n Imported inflation, 530
per capita output, 56 Heterodox programs, 468, 470 Income; see also Disposable income
purpose, 53 Hetzel, Robert, 402n after-tax, 157
Growth accounting equation, 7475 Hicks, John R., 243n aggregate demand level of, 219
Growth policy High-employment surplus, 234 change in equilibrium level,
Asian Tigers, 8788 High-growth countries, 8384 260261
limits to growth, 89 High income, 88 consumption relationship, 218
natural resources, 89 High-powered money, 420, 477n and demand for real money
poor countries, 8889 components, 414 balances, 253254
population growth, 8586 created by Fed, 416417 equilibrium level, 221222
social infrastructure and output, definition, 413 growth and intergenerational
8990 to finance government spending, transfers, 488
Growth process, 6566 475 high, 88
Growth rate Hitler, Adolf, 458 linked to consumption, 335337
of conditional convergence, 83 Holloway, T. C., 228n, 234n and marginal propensity to import,
convergence, 5657 Honda Motors, 23 311
definition, 11 Hong Kong and money supply, 255256
equalizing, 82 growth in, 8788 and net exports, 311
long-run, 6669 investment ratio and schooling, 60 permanent vs. transitory, 341342
Edition
602 INDEX
Income, continued monetary policy in 1980s90s, rational expectations revolution,

in quantity theory of money, 196197 124125
278279 national comparisons, 478 sacrifice ratio, 144, 146
redistribution of, 167 in national income accounting, Inputs
and saving, 216217 3742 Cobb-Douglas production function,
Income determinants, 241 in ordinary business cycles, 75
Keynesian model, 215 461466 factors of production, 2223
Income effect, 351 in political business cycle, in production function, 5457
Income elasticity, 398, 399, 401 173174 Inside lag, 184185, 187
long-run, 401 poll results, 143 Insider-outsider model of
Income tax and price indexes, 3738 unemployment, 131, 159170
as automatic stabilizer, 186187, and prices, 3839 Institutional holdings, 393
227228 rational expectations revolution, Instruments of policy, 194195, 502
and multiplier, 227 124125 Inter-American Development Bank,
proportional, 226 and real money balances, 477 46
Income tax surcharge, 338 and real rate of taxation, 168n Interbank deposits, 416n
Income velocity of money, in stagflation, 122123 Intercept
404406 Tanzi-Olivera effect, 470n of aggregate demand schedule, 221
Increasing returns to scale, 81 unexpected, 146 of consumption function, 216
Indexation in United States 19611969, 119 Interdependence effects
and inflation, 168171 in United States 19612002, 121 exchange rate fluctuations,
interest rates, 168170 in United States 19722002, 289 524531
reasons for, 171 Inflation-adjusted deficit, 470 with flexible exchange rates,
tax brackets, 168 Inflation adjustment, 44, 45 527530
wages, 129n, 170171 Inflationary bias, 203204, imported inflation, 530
Indexed debt, 169 205, 206 monetary and fiscal policy, 527
Indexing clauses, 129n Inflationary inertia, 471472 policy synchronization, 530
India, income level, 83 Inflation differential, 523 Interest
Indicators, 194195 Inflation expectations, 112 compound, 437
Inflation; see also Phillips curve in augmented Phillips curve, on national debt, 482483
benefits to economy, 171172 120124 Interest cost of holding money, 397
and business cycle, 1517 in capital markets, 403 Interest elasticity, 399, 400
caused by money growth, imperfectly anticipated, 164168 Interest rate(s), 4345
461466 perfectly anticipated, 163164 and AD, 246248
and changes in AD, 8 and short-run Phillips curve, in aggregate demand schedule,
costs of, 16, 144, 162168 121122 261263
distributional, 146 uncertainty of, 124 and bond prices/yields, 438441
imperfectly anticipated inflation, Inflation-expectations-augmented change in equilibrium level,
164168 aggregate supply curve, 552 260261
inefficient decision Inflation rate, 39 and composition of AD, 243
making, 164 and central bank independence, and consumption, 349
menu costs, 164, 565 206 control of, 423424
perfectly anticipated inflation, determinants, 6 and credit rationing, 376
163164 expected, 365 and demand for real money
shoeleather costs, 163 in Germany, 294295 balances, 253254
slow growth, 164n and output reduction, 472473 determinants, 241
underestimation problem, 166 in recession of 199091, 292 discounted cash flow analysis, 377
wealth redistribution, 164168 Taylors rule, 200 effect of demand for money, 260
crawling peg to slow, 507 in United States 19722002, effect of inflation, 163
credible policy for, 471472 164165 effect on demand for money,
as cruelest tax, 477n in United States 19751981, 289 401402
definition, 3839 variability, 95 and equilibrium income, 263264
and demand for money, 403 Inflation targeting, 202203 and exchange rates, 446447
destabilizing factors in, 470 Inflation tax, 163n, 474480 in fiscal expansion, 279280
effect on debt, 168170 definition, 475 Fisher diagram, 350
effect on housing, 168170 national comparisons, 478 function of income level, 249
historical and international trends, nature of, 475477 and inflation
463464 Inflation tax revenue, 479480 effect on debt, 169170
and housing costs, 380 Inflation-unemployment tradeoff, effect on housing, 168169
imported, 530 1011, 112, 116120 inflation adjustment, 44, 45
and indexation in augmented Phillips curve, interaction with LM and IS curves,
interest rates, 168170 120124 260
reasons for, 171 bias toward inflation, 203204 and inventories, 382
wages, 129n, 170171 dynamic programming, 207, 208 and investment spending, 244246
measuring, 40 permanent, 120 and investment subsidy, 285, 286
misery index, 174 politics of, 143144 in Japan, 274275
Edition
INDEX 603
lagged adjustment, 401 International Monetary Fund, 501 kinds of opportunities, 84

and liquidity trap, 273275 and balance-of-payments crisis, 506 national comparisons, 385386
long- and short-term, 435438 monetary approach to balance of neoclassical growth theory, 6364
money and credit, 427429 payments, 513514 with population growth, 8586
and money supply, 255256 International trade private vs. social returns, 81
and money supply changes, balance of payments, 300302 q theory, 369370
272273 balance-of-payments deficits, 498 relation to GDP, 361362
need to understand, 242243 beggar-thy-neighbor policy, in simple economy, 31
own rate of interest, 397 327328, 457 versus Social Security Trust Fund,
pegging, 276277, 423 capital flows, 315 489
with perfect capital mobility, 322 exchange rates and adjustments, in Solow model, 82
real asset returns 19601999, 165 508511 steady-state, 66
realized, 165 with fixed exchange rates, 302303 and steady-state consumption, 88
and recession of 199091, 428429 with flexible exchange rates, and stock market, 369370
and residential investment, 303305 volatility of, 361, 362
379380 in Great Depression, 458 Investment decision
versus stock returns, 444445 in IS-LM model, 310313 and cost of capital, 375
on T-bills, 240 marginal propensity to import, discounted cash flow analysis,
in United States 19722002, 289 311312 377378
in United States 20002002, 412 net exports, 311 irreversibility and timing, 375377
varying maturities, 435 percentage of GDP, 299 sources of funds, 374375
yield curve, 438, 439 and real exchange rate, 308 Investment demand, and business
at zero, 274275 repercussion effects, 313 cycles, 227228
Interest rate differential, 314, 315 rise in foreign demand, 323324 Investment demand schedule, 244
and exchange rate expectations, Internet, for economic data, 46 Investment function, 373
521524 Intertemporal elasticity of Investment-output ratio, 385
and exchange rates, 447 substitution of labor, 560562 Investment ratio, and years of
and perfect capital mobility, Intertemporal substitution of leisure, schooling, 60
317318 542543, 561 Investment requirement line, 8586
Interest rate equalization, 522523 Intervention; see Foreign exchange Investment schedule, 245246
Interest rate targets, 424427 market, intervention in Investment sector
short- and long-run, 426427 Inventories business fixed investment,
Intergenerational accounting, 485 in business cycles, 383384 361362, 373378
Intergenerational transfer definition, 380 government investment, 363
from income growth, 488 just-in-time systems, 384 inventory investment, 362, 380384
from political process, 488489 reasons for holding, 381 residential investment, 362,
from population growth, 487488 Inventory cycle, 384 378380
Intermediate Federal Reserve targets, Inventory investment, 362, 380384 and stock of capital, 362
430 accelerator model, 382 Investment spending, 28
Intermediate goods, 35 anticipated vs. unanticipated, and accelerator model, 382
Intermediate targets, 194 382383 and business cycle, 371
Internal balance, 316, 499500 and business cycles, 383384 characteristics, 371
International adjustments and change in GDP, 382 and interest rate, 244246
automatic adjustment mechanisms, unplanned, 215 in IS curve, 244252
496 Inventory-sales ratio, 381 and low rental cost of capital, 368
exchange rate changes and trade, Investment Investment subsidy, 285, 286
508511 and aggregate supply, 384386 Investment tax credit, 285, 286,
exchange rate regimes, 531533 with capital mobility, 318 366367
under fixed exchange rates, collapse in Great Depression, 459 temporary, 370
496508 component of aggregate demand, Investor confidence, 101
automatic, 499 28 Iraq, 134, 291
crawling peg, 507 conduit of monetary policy, 364 Isard, Peter, 530n
devaluation, 501502 definition, 28, 362 IS curve, 242, 269270
exchange rates and prices, demand for capital, 361362 and change in money stock, 326
503506 demand for capital and flow of, and crowding out, 281
expenditure switching/reducing, 364373 definition, 244
499502 from desired capital to, 370373 derivation of, 247
financing, 498499 direction of, 84 effect of exchange rate changes, 323
prices in open economy, 496498 dynamic behavior, 373 effect of fiscal policy changes,
under flexible exchange rates, in endogenous growth model, 279284
515521 7880 effects of monetary expansion,
interdependence effects, 527530 equal to saving, 31, 221222 516517
monetary approach, 512515 gross and net, 363 equation, 279
International debt crises, 507 hostile environment for, 89 equilibrium income, 246247
International financial system by households, 336n and equilibrium interest rate,
collapse, 457 and interest rate, 244246 259261
Edition
604 INDEX
IS curve, continued Jevons, W. Stanley, 395n as human capital, 28

explanation of, 243n Johansson, Kerstin, 147n new entrants, 153
goods market, 244252 Johnson, Harry G., 513n persons out of, 147n
investment and interest rate, Johnson, Lyndon B., 338 total unemployment 19482002,
244246 Joines, Douglas, 475n 150
investment demand schedule, Jones, Charles I., 6465, 85n, 90 turnover rates, 151
244246 Jones, Larry E., 164n and unemployment 2002, 148
as goods market equilibrium Judd, John P., 200 variation in unemployment rates,
schedule, 248 Judson, Ruth A., 395 149
and Great Depression, 460 Juhn, Chinhui, 147n Labor market
interest rate and AD, 246248 Just-in-time systems, 380, 384 equilibrium, 98
and investment subsidy, 285, 286 inflexibility in Europe, 159
and marginal propensity to import, K insider-outsider model, 159170
311313 Kareken, John, 185 long-term retention, 128130
and multiplier, 249, 250 Kashyap, Anil, 428n in macroeconomics, 3
pegging interest rate, 276277 Katz, Lawrence, 161n structure, 151, 152153
position of, 249252 Keguel, Manuel A., 469n, 478n Labor market frictions, 101
shift caused by change in Keynes, John Maynard, 3, 128n, 273, Labor market turnover, 147, 151
autonomous spending, 251 397, 458459, 467n Labor productivity, 55n
shifts from autonomous spending, Keynesian aggregate supply curve, Labor supply, and permanent wage
260261 98, 99101 changes, 562
shifts in, 426 Keynesian economics Labor unions, in Europe, 159160
slope of, 248249 aggregate demand policy, 103104 Laffer, Arthur, 233n
IS-LM equilibrium, 270 on consumption, 335, 337 Lagged consumption, 337
IS-LM model, 101, 241 explanation of Great Depression, Lags, 182188
and aggregate demand schedule, 459460 and automatic stabilizers,
261264 income determination, 215 186187
algebraic treatment, 263264 and monetarist challenge, 460, decision and action lags, 185186
and credit rationing, 376 464465 discrete lag, 187
definition, 242 new classical revolution against, distributed lag, 187188
equilibrium income and interest 563 gradualist or cold turkey policies,
rate, 263264 new model of price stickiness, 188
and fiscal expansion, 320 543544 inside lag, 184185, 187
fiscal policy in, 279284 price stickiness, 99 interest rate adjustments, 401
fiscal policy multiplier, 264265 price stickiness model, 563566 long and variable, 464
and monetary expansion, 319320 reasons for holding money, 397 monetary or fiscal policy, 188
monetary policy in, 270279 time frame in, 105 outside lag, 185, 187188
monetary policy multiplier, 265 Keynesian revolution, 459460 and recognition lag, 185
money stock/interest rate targets, Kim, Michael, 309 Lahiri, Hujal, 513n
424426 Kindleberger, Charles, 457n Laidler, David, 465
Mundell-Fleming model, King, Robert G., 202n Large-denomination time deposits,
317327 Klenow, Peter J., 4041, 127n 393
policy tools, 269 Kokkelenberg, Edward C., 36n Latin America, hyperinflation, 469
structure of, 243 Kotlikoff, Laurence J., 352n, 485, Layard, Richard, 159n
international trade, 310313 490n Layoffs, 148
Israel, 470 Kremer, Michael, 85n Lebow, David E., 41
Italy, working age/retirement age Krueger, Alan B., 156n Leiderman, L., 469n
population, 488 Krugman, Paul, 273n, 500, 505n, Leith, J. Clark, 459n
Ito, Takatoshi, 529 510n, 511n Lender of last resort, 419
Kuwait, 134, 291 Level of aggregate demand, 7
J Kydland, Finn, 203n Level of aggregate supply, 7
Jaffee, Dwight, 376 Liberals, on policy mix, 287288
Jansen, Dennis W., 201n, 402n L Life-cycle hypothesis, 339342
Japan Labor and demography, 340
consumption share of GDP, 26 in capital-labor ratio, 56 versus permanent-income
convergence with United States, factor payments to, 25 hypothesis, 341
5657 full employment concept, 1415 Life-cyclepermanent-income
GDP 18202000, 5354 and growth, 55 hypothesis
interest rates, 274275 Labor-augmenting technology, 69, 71 Barro-Ricardo equivalence
investment ratio and schooling, 60 Labor contracts, 128130 proposition, 349353
unemployment, 160 cost-of-living adjustments, 170 and buffer-stock saving, 347348
unemployment rate, 4243 long-term, 128130 consumption under certainty,
unit labor costs, 521 wage-indexing clauses, 129n 344348
working age/retirement age Labor costs, 132 and durable goods, 342
population, 488 Labor force, 12 lifetime budget, 344
J-curve effect, 510511 changing composition of, 155 lifetime utility, 344
Edition
INDEX 605
liquidity constraint and myopia, M Marginal propensity to save, 217

346347 M1 demand for money, 401402 Marginal utility of consumption,
marginal utility of consumption, M1 money supply, 293, 391, 392, 344345
344345 394, 399, 426 Marginal utility of leisure, 561
origin of, 341 M2 money inflation link, 462, Market, in macroeconomics, 3
versus traditional model, 345346 463464 Market clearing, 539
Lifetime budget constraint, 344 M2 money supply, 293, 391, 392, Market clearing prices/wages, 127
Lifetime utility, 344 393394, 399, 405, 426, 550 Markup, on labor costs, 132
Limits to growth, 89 M3 money supply, 391, 392, 393 Marquez, J., 508n
Lindbeck, Assar, 131n, 160n Maastricht Accord, 305, 474n Masciandaro, Donato, 206n
Liquid assets, 392 MacDonald, Ronald, 515n Masson, Paul, 327, 527n, 530n
Liquidity constraints, 346347 Macroeconomics; see also New Maturities, 435
Liquidity preference, 400 macroeconomics Mayer, Thomas, 453n
Liquidity trap definition and focus, 3 McCallum, Bennett T., 77n, 244n,
and fiscal policy, 281 economic models, 411 465
and monetary policy, 273275 fixed productive capacity, 4, McCulloch, Huston, 44n
Liviatan, N., 469n 68 McLaughlin, Kenneth J., 128n
LM curve, 242, 269270 medium run, 910 McNees, Stephen K., 191, 291n
and change in money stock, short run, 4, 89 Medium of exchange, 395
325326 very long run, 4, 56 Medium-run economic model, 910
classical case, 278279 on fluctuations in output, 215 Mehra, Yash P., 402n, 404
and crowding out, 281284 focus of, 95 Meltzer, Allan H., 376n, 465
definition, 252 meaning of price in, 97 Menu costs, 163, 565
and demand for money, 391 and monetarism, 464465 Meulendyke, Ann-Marie, 424n
derivation of, 255 Phillips curve in, 119120 Mexico
effects of monetary expansion, prerequisites, 1819 balance-of-payments crisis, 506
516517 rational expectations model, devaluation, 500, 503505
and equilibrium interest rate, 472473 dollar price levels, 508
259261 rational expectations revolution, external balance, 504505
explanation of, 243n 112, 124125 peso crisis, 504506
and Great Depression, 460 simplifying models, 12 Meyer, Bruce, 161n
and increase in money supply, 258 Macrotheory, 3, 4, 12 Meyer, Laurence H., 202n, 475n
and liquidity trap, 273 and national income accounting, 22 Microeconomics, 97
and monetary expansion, Maddison, Angus, 13, 53, 57, 78 and price stickiness, 564
319320 Magrath, W., 36n Microeconomic theory, 563564
and money market, 252259 Maki, Dean M., 348n Minford, Patrick, 157
demand for money, 253254 Malinvaud, Edmond, 159n Minimum wage, 157
money supply, 255257 Malkiel, Burton, 443n Misery index, 174
as money market equilibrium Malpass, David, 505 Mishkin, Frederic S., 182n, 346n,
schedule, 255257 Malthus, Thomas R., 85n 376n, 551n
in open market operations, Managed float, 305 Mitchell, Olivia S., 490n
271272 Mandatory government spending, 480 Models; see Economic models
pegging interest rate, 276277 Mankiw, N. Gregory, 3, 59, 77n, Modigliani, Franco, 3, 167n, 341,
position of, 257 118n, 120n, 127n, 128n, 403, 465
shifts in, 426 131n, 346, 349n, 454, 563, Moggridge, D. E., 459n
slope of, 257 564, 565566 Monetarism
L money supply, 392, 393 Manuelli, Rodolfo E., 164n on flexible exchange rates, 465
Loan contracts, effect of inflation, Marginal loss function, 193 and Great Depression, 460
168170 Marginal product of capital, 54, and hyperinflation, 472473
Lombard Street (Bagehot), 419 365, 366 and macroeconomics, 464465
London School of Economics, 117 Marginal-product-of-capital schedule, Monetarists, 427
Long-run aggregate supply curve, 365, 367 Monetary accommodation, 283284
78, 9899, 108 Marginal product of labor, 54, 561 Monetary aggregates
Long-run Fed targeting, 426427 Marginal propensity to consume, changes in definition of, 394
Long-run growth, 4, 68, 81 216, 221 components, 392393
Long-run growth rate, 6669 debate over, 335 Monetary approach to balance of
Long-term interest rates, 435438 and demography, 340 payments
Long-term unemployment and equilibrium income, 221 and depreciation, 514515
in Europe, 160 in life-cycle-hypothesis, 339342 domestic credit ceilings, 514
signal of, 156 long- vs. short-run, 335 and International Monetary Fund,
Loss function, 193, 207 and multiplier, 223, 335 513514
Lown, Cara, 278n, 429 out of permanent income, 341342 sterilization operations, 513
Lucas, Robert E., Jr., 3, 77, 78, 85n, out of transitory income, 341342 Monetary base, 413
125, 163n, 472, 539540, with taxation, 226227 fall in, 478
552553 Marginal propensity to import, growth rate, 475, 476
Lucas critique, 546 311313 and open market purchase, 422
Edition
606 INDEX
Monetary expansion in recession of 199091, 290291 Money stock

adjustments to, 272 and residential investment, adjustments to change in, 325326
under fixed exchange rates, 378380 components, 391394
319320 rules vs. discretion, 198201 control of, 423424
with flexible exchange rates, 326 surprise changes in, 125 currency-deposit ratio, 414
short- and long-term effects, target options, 430 determination of, 413416
516517 Taylors rule, 200 currency-deposit ratio, 415
in United States, 326, 327 transmission mechanism, 272273 reserve-deposit ratio, 416
Monetary growth rule, 464 in United States 1980s90s, endogenous, 320
Monetary History of the United 196197 in Great Depression, 454455
States (Friedman & at zero interest rate, 274275 high-powered money, 413, 414
Schwartz), 419, 460 Monetary policy multiplier, 187, 193, M1, M2, M3, 391, 392394
Monetary policy, 242, 270279 265, 548 and money multiplier, 413
accommodating, 136 Monetary rule, 195 reduced by inflation, 477
action lag, 185186 Monetizing budget deficit, 283284, Money stock targets, 424427
anticipatory, 294 474475 short- and long-run, 426427
of Argentina, 533 Money; see also Demand for money; Money supply, 242
and bank reluctance to lend, High-powered money and aggregate demand, 391
274278 cash holdings, 395 in aggregate demand curve,
capital account, 314315 credit and interest rates, 427429 101103
and central bank independence, definition, 391 components, 391394, 413
205206 economic functions, 394396 and deficits and inflation tax,
classical case, 278279 medium of exchange, 391, 395 474480
to combat recession of 197981, standard of deferred payment, and demand for money, 271272
288290 396 effect of bank loans, 422
conduit of investment, 364 store of value, 395 financial innovation in, 394
constant-growth-rate rule, 198199 unit of account, 395 and fiscal policy multiplier,
and credit rationing, 376 with flexible exchange rates, 264265
decision lag, 185186 515521 growth following stabilization,
effect on rental cost of capital, flight out of, 403 470n
367369 income velocity of, 404406 growth in recession of 199091,
for fine tuning, 194198 interest cost of holding, 253n 428429
during fiscal expansion, 283284 opportunity cost of holding, 398 impact on aggregate demand,
following terrorist attack, 186 in ordinary business cycles, 9597
in Germany 199092, 293295 461466 inflation from growth of, 461466
in Great Depression, 455, 460 quantity theory, 103, 278279, and interest rate changes, 272273
Greenspan on, 412 405406, 462 and LM curve, 255257
instruments of control role in economy, 240 and monetary policy multiplier,
discount rate, 418420 as safe asset, 400 265
Fed balance sheet, 417418 standard of deferred payment, 396 predictable vs. surprise shifts, 125
Fed funds rate, 420 Money creation, by Federal Reserve and price changes, 127128
financing budget deficits, System, 271272 and price level, 9597, 398
421422 Money demand function, 396 quantity theory equation, 545
foreign exchange market Money illusion, 396 in rational expectations model,
intervention, 418 Money market, 241 547549
loans and discounts, 418420 adjustments in, 272 reaction to changes in, 540
open market purchase, 416417 equation, 242 and shift in LM curve, 258
reserve ratio, 421 equilibrium in, 101, 102103 and velocity of money, 103
international effects, 299 and LM curve, 252259 Money supply shocks, 8n
and liquidity trap, 273275 need to understand, 242243 Money targets, 464
and monetarist challenge, 460 Money market deposit accounts, 392, Montiel, Peter, 513n
from 1988 to 1992, 428429 394 Morales, Juan A., 469n
open market operations, 270272 Money market equilibrium, Mordach, Jonathan, 347n
and output, 426 259261 Mortgage interest deduction,
outside lag in, 188 Money market equilibrium equation, 168169
pegging interest rate, 276277 263 Mortgage rates, 364
and perfect capital mobility, Money market equilibrium schedule, Mortgages, 378380
317318 252, 255 monthly payment components, 380
and perfect foresight model, Money market mutual funds, 392, Motley, Brian, 155n
546547 393394 Moulton, B. R., 36n
in policy mix, 284288 Money multiplier Muet, Pierre-Alain, 499n
in portfolio of policy instruments, and bank loans, 422 Multiplier, 222225
192 definition, 413 as automatic stabilizer, 187
purpose, 269 determination of money stock, balanced-budget, 233
rational expectations equilibrium 413416 definition, 223
approach, 541 equation, 414 economic use, 224n
Edition
INDEX 607
equation, 223 and short-run Phillips curve, in Germany, 294295

fiscal policy, 264265 121122 and housing demand, 379380
graphical interpretation, 224225 and unemployment benefits, versus real interest rate, 45
and income tax, 227 157161 versus realized rate, 165
and marginal propensity to Natural resources Nominal money demand, 396
consume, 223, 335 factor in growth, 59 Nominal money supply, 102, 255
monetary policy, 265 and limits to growth, 89 Nominal price stickiness, 563564
and output fluctuations, 224 Negative feedback, 200 Nominal wage, 120
purpose of, 193 Negogiated order of withdrawal changes in, 128
and slope of IS curve, 249 (NOW) accounts, 394 and price level, 127
Multiplier uncertainty, 188189 Nelson, Charles R., 167n, 541, 556, raised above inflation, 171172
definition, 192 558, 560 resistance to cuts in, 172
and policies, 193194 Nelson, Edward, 244n Nonaccelerating inflation rate of
Mundell, Robert, 317 Neoclassical growth equilibrium, 84 unemployment, 118n, 156n
Mundell-Fleming model, 321 Neoclassical growth theory; see Nonlinear aggregate supply, 100, 114
with fixed exchange rates, Growth theory Nonsterilized intervention, 526527
317320 Neoclassical theory of aggregate Nordhaus, William D., 36n, 37, 89n,
with flexible exchange rates, supply, 539540 172n
320327 Net domestic product Norway
Murphy, Kevin, 147n definition, 23 GDP 18202000, 5354
Myopia, 346347 factor payments, 24 per capita GDP, 59
Net exports, 2829, 32 Notional rate of unemployment, 155
N Net investment, 28, 363
NAIRU; see Nonaccelerating Net investment income, 300 O
inflation rate of Net present value, 440, 441 Off-budget items, 231
unemployment Net private capital inflow, 301n Official reserves, 301n
Nakamura, Leonard, 41 Neumark, David, 157 Official reserve transactions, 513
National Bureau of Economic Neumeyer, Pablo Andres, 478n Oil embargo
Research, 15n, 46 New Classical revolution, 563 Oil price increase/decrease, 134, 135,
National debt New Deal, 457 136, 291
burden of, 483484 New Keynesian counterrevolution, 563 Okun, Arthur, 145
and debt-income ratio, 484, 485 New Keynesian economics, 543544 Okuns law, 132133, 149
generational accounting, 485 price stickiness model, 563566 and aggregate supply curve,
growth and instability, 484 New macroeconomics 132133
interest on, 482483 imperfect information AS curve, costs of cyclical unemployment,
ownership of, 483 552555 161162
percentage of GDP, 34, 484 Keynesian model of price equation, 132
size-of-government debate, stickiness, 543544, 563566 GDP-unemployment relation, 145
485487 Lucas critique, 546 and labor costs, 132
National income, 2425 random walk of GDP, 541, and sacrifice ratio, 146
National income accounting, 46; see 556560 Oliner, Stephen D., 375n, 428n
also Gross Domestic Product rational expectations equilibrium Olivera, Julio, 470n
balance of payments accounts, models, 539541 Olsen, Mancur, 77n
301302 rational expectations revolution, On-budget items, 231
capital account, 301 544552 Open economy, 299, 311
current account, 300301 real business cycle theory, aggregate demand curve, 497498
with government and foreign trade, 542543, 560563 role of prices, 496498
3134 stochastic dynamic general Open market desk, 423424
inflation and price indexes, equilibrium, 567 Open market operations, 270272
3738 unsettled issues, 566567 Open market purchase
net private capital inflow, 301n Newton, Isaac, 83 mechanics of, 416418
official reserves, 301n New York City, 186 and monetary base, 422
price indexes, 3942 New York Stock Exchange, 348 Operational bequest motive, 352353
reasons for studying, 22 Nickell, Stephen, 159n Opportunity cost of capital, 365
with saving and investment, Nixon, Richard M., 206 Opportunity cost of holding money,
3234 No-growth countries, 8384 397, 400, 403
in simple economy, 3031 Nominal demand for money, 253 Organization of Petroleum Exporting
National Recovery Administration, 457 Nominal exchange rate, 302 Countries, 97, 134, 184
Natural rate of unemployment, 101, Nominal GDP, 103 Orphanides, Athanasios, 156n
118 definition, 3738 Output
determinants, 152153 targeting, 201 actual and potential, 16
estimates of, 153156 Nominal interest rate, 290 adjustment to changes in AD,
and frequency of unemployment, and cost of borrowing, 368 272273
153 definition, 44 and aggregate demand curve,
hysteresis and rising rate, 156 effect of inflation, 163 101103
reducing, 157 Fisher relationship, 523 and aggregate supply, 108
Edition
608 INDEX
Output, continued Patinkin, Dan, 272n, 459460 origin and purpose, 117119
in AS-AD model, 95 Pay-as-you go system, 487, 489 policy trade-off, 119120
in classical AD policy, 104 Peak, 14 and price adjustments, 10, 11
Cobb-Douglas production function, Peel, David A., 172n without price expectations, 120
75 Pegged exchange rates, 303n and prices, 119
current, 35 Pegging the interest rate, 276277, rational expectations revolution,
cyclical component, 556 423 124125
determinants, 6 Per capita consumption, 335336 and sacrifice ratio, 146
and disposable income, 3132 Per capita GDP, 5, 56 short-run, 121122, 125
domestic, 310311 national comparisons, 78 and stagflation, 112, 122123
effect of changes in factors of in Norway, 59 unemployment gap, 118119
production, 61 and population increase, 5758 for United Kingdom, 118
effect of multiplier, 222225 of United States in 2000, 22 wage-employment relationship,
and equilibrium income, 219220 Per capita income, steady-state 126131
equilibrium level, 215 values, 63 wage inflation, 117119
expected from capital stock, Per capita output, 56 Physical capital, 363
365366 Per capita production function, national comparisons, 6465
fluctuations, 215, 224, 541543 6263 Pindyck, Robert, 192n, 377n
with full employment, 99 Per capita real income growth rates, Plosser, Charles I., 541, 556, 558,
interaction with LM and IS curves, 13 560
260 Perfect capital mobility, 515 Policies/policy
IS curve shifts, 426 adjustment to real disturbances, active intervention, 184
linked to unemployment, 132 323324 activist, 195201
long run, 7 definition, 314 fine tuning, 195198
long-run level of, 6768 with fixed exchange rates, opposition to, 195
and marginal propensity to 317320 rules vs. discretion, 198201
consume, 221 under flexible exchange rates, certainty-equivalence, 194
in medium run, 10 320327 credibility, 471472
and monetary policy, 426 Perfect competition, 563 and duration of disturbances,
money, inflation and, 463 Perfect foresight model, 546547 183185
and money growth, 550551 Permanent disturbances, 183185, dynamic inconsistency
and money supply, 9597 198 and central bank independence,
national comparisons, 6465 Permanent income, 341342 205206
and policy mix, 284285 measurement, 342 formal approach, 207208
poor measurement of, 36 Permanent-income hypothesis, 339, and rules vs. discretion,
price level rise, 552555 342343 203208
production and demand sides, 22 versus life-cycle hypothesis, 341 and economic models, 189,
in production function, 5457 origin of, 341 190191
production of, 2223 Permanent inflation-unemployment expectations and reactions,
ratio of investment to, 385 trade-off, 120 188191
sacrifice ratio, 144, 146 Permanent shocks, 557559 changes in policy regime,
and saving and investment, Permanent supply shock, 137 189190
221222 Perpetuities, 441 reaction uncertainty, 178
in short run, 89 Perron, Pierre, 559 formulation exercise, 182183
in simple economy, 30 Perry, George L., 171 impossibility of avoiding, 181
and social infrastructure, 8990 Personal saving, 354 indicators, 194195
steady-state, 66 Petersen, Bruce C., 375 instruments, 194195
in supply-side policy, 107108 Phelps, Edmund S., 127, 153, 552n investment subsidy, 285, 286
trend component, 556 Phillips, A. W., 117, 118 lag effects, 182188
Output gap, 113 Phillips curve, 116120 limits of, 181
in business cycle, 1415 and aggregate supply curve, and multiplier uncertainty, 192,
definition, 15 131134 193194
Output-inflation trade-off, 146 coordination approach, 127128 negative feedback, 200
Output shock, 556, 557 definition, 116 to restore balance
Output targeting, 202 dynamic inconsistency and, devaluation, 501502
Output-unemployment tradeoff, 149, 203205 expenditure reduction,
161162 dynamic programming and, 207 499506
Outside lag, 184185, 187188 and economic policy, 204 expenditure switching, 499506
Overvaluation, 511 evidence for, 124 by tariffs, 500501
Owner-occupied homes, 364 and inflationary bias, 203204 rules vs. discretion, 203208
Own rate of interest, 397 inflation-expectations-augmented, target choices
120124 inflation, 202203
P and inflation targeting, 203 nominal GDP, 201
Pabilonia, Sabrina Wulff, 157n and market clearing, 127 real GDP, 201
Parker, Jonathan A., 348n, 355n and NAIRU, 156n targets, 194195
Parkin, Michael, 465 and Okuns law, 132133 Taylors rule, 200
Edition
INDEX 609
and uncertainty, 191194 Position and output rise, 552555

multiplier, 193194 of IS curve, 249252 and potential GDP, 99
portfolio of instruments, 192 of LM curve, 257 short run, 89
working backward, 181182 Potential GDP, 99, 138, 558559 speedy adjustments, 10
Policy dilemmas, 315317 Potential output, 4, 100, 215 wages indexed to, 129n
Policy diversification, 192 versus actual output, 16 Price of capital, 364, 365
Policy irrelevance, 540541 definition, 15 Price shocks, 134, 135, 136
Policymakers Poterba, James, 157n, 355n Price stickiness
announcements by, 200201 Poverty trap, 8586 coordination problems, 127128
and AS/AD curves, 181182 Precautionary motive for holding imperfect information on, 127
credibility, 189190 money, 399 in Keynesian model, 99
dynamic inconsistency, 203208 Precautionary saving, 347348 and market clearing, 127
dynamic programming, 207 Prescott, Edward, 203n microeconomic justification, 566
foreign, 530 Present value, 440 new Keynesian model, 543544,
inflationary bias, 203204 Price(s) 563566
interaction with economy, 204205 and aggregate demand, 108 summary on, 131
multiplier uncertainty, 188189 in classical AD policy, 104 Primary deficit/surplus, 482483
reaction uncertainties, 189 of computers, 137 Private returns to capital, 81
recognition lag, 185 and exchange rate overshooting, Private saving, 354
reputation for consistency, 205 517519 Producer price index, 4142
target options, 201203 and exchange rates, 503505 Production
and uncertainty, 181 with flexible exchange rates, of output, 22
uncertainty about models, 515521 response to autonomous spending,
191192 during hyperinflation, 466467 222225
Policy mix and inflation, 3839 Production function
in action in macroeconomics, 97 definition, 2223
Germany in 199092, 293295 and money supply, 102 in endogenous growth model,
peacetime expansion of 1990s, money supply and changes in, 8182
291292 127128 formula, 55, 368
recession and recovery in 1980s, in open economy, 496498 in growth accounting, 5457
288290 in Phillips curve, 119 and human capital, 59
recession of 199091, 290291 and purchasing power parity, per capita, 6263
recession of 2001, 292293 519521 technology parameter, 6970
to combat hyperinflation, 470 setting and changing, 564 in two-sector model, 84
composition of output, 284285 Price adjustments, 10, 11 Productivity, 54
conservatives vs. liberals, 287288 mechanism, 112115 national comparisons, 6465
for full employment, 285287 slow, 125, 129, 130 shocks to, 543
Policy regime changes, 189190 speed of, 114 and social infrastructure, 8990
Policy synchronization, 530 staggered, 130 Productivity increases, 12
Policy tools, 269 Price expectations, 112 Propagation mechanism, 542543,
Political business cycle theory, Price indexes 562
143144 consumer price index, 4041 Proportional income tax, 226
definition, 172 GDP deflator, 3940 as automatic stabilizer, 227228
issues in, 173 imperfections, 40 Purchasing power parity, 308310
time factor, 173175 and inflation, 3738 with flexible exchange rates,
Political process producer price index, 4142 519520
fixing Social Security, 489490 Price level
intergenerational transfers, 488489 and AD curve, 101103 Q
Political risks, 314 in aggregate demand schedule, q theory of investment, 369370
Pollard, Patricia, 488 261263 Quality improvements, 36
Poole, William, 172n, 182n, 424, in AS-AD model, 78, 95 Quantitative theory techniques, 560
426427, 465 in classical aggregate supply Quantity equation, 405406
Poor countries, 8586, 8889 curve, 9899 Quantity theory equation, 545
Population, ratio of working age to determinants, 6 Quantity theory of money, 103,
retirement age, 488 effect of crowding out, 283284 278279, 405406, 462
Population growth and euro, 305 Quarterly improvements, 37
and growth policy, 8586 expectations of, 540 Quigley, John M., 348n
intergenerational transfer from, increase in U.S. 19722002,
487488 164165 R
in neoclassical growth theory, 69 and inflation, 3839 Random walk
zero, 488 and inflation rate 19602000, definition, 443
Porter, Richard D., 395 1617 equation, 442
Portfolio, 400 in Keynesian aggregate supply and stock prices, 441446
Portfolio disequilibrium, 272273 curve, 98, 99101 Random walk model, 345
Portfolio diversification, 192n and money supply, 9597, 398 Random walk of GDP, 541
Portfolio of policy instruments, 192 and nominal/real wage, 127 AS/AD in, 556560
Edition
610 INDEX
Rankin, Neil, 544n Real wage, 120 Retained earnings, 373374

Rate of return, 318 changes in, 128 Retirement age population, 488
Rational expectations equilibrium fall in, 136 Return on assets, 400
models, 539541 flexibility of, 509 Return on foreign bonds, 523
empirical evidence, 549552 and inflation, 171172 Ricardian equivalence, 352
policy irrelevance in, 540541 and price level, 127 Ricardo, David, 351
Rational expectations model Real wage stickiness, 509 Rich, Robert W., 144, 146
assumption, 547 Real-world models, 1213 Risk aversion, 400
basic views, 472 Recession(s) Risky asset, 400
and consumption theory, 345 in aggregate supply curve, 100 Rogers, John, 308n
description, 547549 budget deficits in, 231232 Rogoff, Kenneth, 309
forecast errors, 548, 549 distributional consequences, Romer, Christine D., 228n, 550551
monetarism and hyperinflation, 145146 Romer, David H., 59, 127n, 128n,
472473 GDP loss in 20012002, 162 346n, 550551, 552n, 564n
perfect foresight model, 546547 Keynesian explanation, 459 Romer, Paul, 3, 77, 81
policy regime changes, 189190 output gap, 15 Roosevelt, Franklin D., 453, 455457
simplified AS-AD model, post-World War II, 95 Roosevelt administration, 457
545546 and unemployment, 15 Rose, Andrew, 151n, 309n
Rational expectations revolution, 112, in United States 190091, Rossini, F., 36n
124125, 544552 291292 Rubinfeld, Daniel, 192n
Reaction uncertainties, 189 in United States 1970s80s, Rudd, Jeremy, 41
Reagan, Ronald W., 288 288290 Rudebusch, Glenn D., 200, 375n,
Reagan administration, 161n in United States 198182, 196 428n
Reagan-Volcker disinflation, 473 in United States 1982, 289 Rules vs. discretion, 198201,
Real asset returns, 165 in United States 199091, 196, 203208
Real balance effect, 272n 290291, 428429
Real business cycle theory in United States 2001, 269 S
consumption-leisure tradeoff, 562 Recognition lag, 185 Sachs, Jeffrey D., 59n, 171n, 469n,
deep parameters, 562 Redistribution effect of inflation, 506n
definition, 542 164168 Sack, Brian, 123n
disturbances, 543 Reis, Ricardo, 131n Sacrifice ratio
propagation mechanism, 542543, Relative prices definition, 472
562 adjustments and exchange rates, and disinflation, 472474
simple model, 560563 509 international perspective, 144
Real devaluation, 503505 and trade balance, 510511 and Okuns law, 146
Real estate market collapse, Relative purchasing power Sahay, Ratna, 467n
274275 parity, 310 Saint-Paul, Gilles, 160n
Real exchange rate Rental cost of capital, 364, 365 Sala-i-Martin, Xavier, 77n
Canada and U.S., 520 and depreciation, 365 Samuelson, Paul, 83
and crawling peg rate, 507 deriving, 365 Sargent, Thomas J., 3, 189n, 468,
definition, 308 effects of fiscal/monetary policies, 472473
equilibrium, 520 367369 Saving
and purchasing power and inflation, 365 buffer-stock, 347348
parity, 308 and interest rate, 365 business, 354
Real GDP and investment spending, 368 composition of, 354
chain-weighted estimates, 37n and taxes, 366367 and consumption, 216217, 339,
definition, 3738 Repercussion effects, 313 349
and tax cuts of 2001, 293 Repetto, R., 36n definition, 217
trend path, 1415 Replacement cost of capital, disposal by private sector, 33
Real GDP targeting, 201 369370 in endogenous growth model,
Real interest rate, 4345 Replacement ratio, 157 7880
definition, 44, 290, 368 Replication agreement, 75 equal to investment, 31, 221222
expected, 365 Reporting effects, 161 golden rule level of, 88
and housing demand, 379380 Repurchase agreements, 393 government vs. private, 354
versus nominal rate, 45 Required reserves, 416 in life-cycle theory, 339342
Realized interest rates, 165 Reservation wage, 157 in national income accounting,
Real money balances Reserve deposit ratio, 416 3233
demand for, 253, 396, 402 Reserve ratio, 413, 414, 421 neoclassical growth theory, 6364
effect of crowding out, 283 Reserves, 303 operational bequest motive,
equal to supply, 255 Residential investment, 362 352353
and inflation, 477 effect of inflation and taxes, 380 percentage of GDP, 355
and portfolio disequilibrium, and monetary policy, 378380 in permanent-income theory,
272273 share of GDP, 379 342343
Real money demand, 396, 401 Resources, 1112 precautionary, 347348
Real money supply, 257 depletion disasters, 89 in simple economy, 30
and aggregate demand, 101102 and GDP growth, 1415 in Solow model, 82
Edition
INDEX 611
Saving rate and economic efficiency, 489 crash of 1987, 196, 456
correlated across countries, 77 indexed, 169170 linked to bond market, 445
and growth rate, 56 intergenerational transfers, q theory of investment, 369370
international differences, 353355 487489 returns vs. interest rate,
in neoclassical growth theory, pay-as-you-go system, 487, 489 444445
6669 predicted crash, 490 rise and fall 19922001, 446
Savings bonds, 393 and price indexes, 4041 Stock prices
Savings deposits, 392 reform proposals, 489490 in Canada, 441442
Schieber, Sylvester J., 490n Social Security Administration, 457 random walk theory, 441446
Schooling, and GDP, 60 Social Security Trust Fund, 487n, Store of value, 395, 399400
Schuler, K., 512n 489 Structural surplus, 234
Schwartz, Anna J., 419, 453n, 454, Solow, Robert M., 3, 5758, 61, Substitution effect, 351
455n, 460, 465, 494, 512n 130n, 156n, 185 Summers, Lawrence, 156n, 542n
Search unemployment, 153 Solow growth model, 7880, 82 Summers, Robert, 77n
Seater, John, 346n and population growth, 85 Supply, and costs, 132
Securities and Exchange Solow residual, 58, 70 Supply shocks, 8n
Commission, 457 Souleles, Nicholas S., 347n accommodation of, 136137
Seigniorage South Korea, growth in, 8788 adverse, 134136
definition, 475 Speculative bubble, 528529 definition, 134
measure of, 479n Speculative capital flows, 523524 favorable, 138
Seligman, Edwin, 466n Speculative demand for money, transitory or permanent, 137
Shaffer, Jeffrey, 527n 399400 wage indexation for, 170171
Shafir, Eldar, 396n Speed of price adjustments, 114 Supply-side economics, 106108,
Shapiro, Matthew D., 4041 Spell of unemployment, 151 233n
Share prices, 369370 Spillover effects, 527530 Survey of Current Business, 46
Sheffrin, Steven, 195n Stabilization Svensson, Lars O. E., 202n
Shiller, Robert J., 348n in Bolivia, 469 Sweden
Shimer, Robert, 149n heterodox programs, 469, 470 in Great Depression, 458
Shocks, 7n money growth following, 470n job finding, 160
and activist policies, 195 Stabilization policy, 184, 459
to government spending, 543 Stable equilibrium, 86 T
money supply, 8n Stagflation, 112, 122123 Tabellini, Guido, 206n
permanent or transitory, 557559 Staggered price adjustments, 130 Taiwan
to productivity, 543 Staggered wage-setting, 129130 growth in, 8788
Short-run aggregate supply curve, Staiger, Douglas, 156 investment ratio and schooling, 60
89, 98, 99101, 116 Standard and Poors 500 index, Takagi, Shinji, 529
Short-run economic model, 4, 89 444445 Tanzi, Vito, 470n
Short-run Fed targeting, 426427 Standardized budget surplus, 234 Tanzi-Olivera effect, 470n
Short-run Phillips curve, 121122, Standard of deferred payment, 396 Targets, of policy
125, 207 Starr, Ross, 394n inflation, 202203
and sacrifice ratio, 146 Startz, Richard, 544n intermediate, 194
Short-run price stickiness, 99 Statistics Canada, 46 nominal GDP, 201
Short-term interest rates, 435438 Steady state, 63 output, 202
Short-term Treasury securities, 393 versus continued growth, 84 real GDP, 201
Shoven, John B., 490n definition, 65 ultimate, 194
Sichel, Daniel, 401n Steady-state consumption, 88 Target zones, 531532
Siklos, Perre, 473 Steady-state equilibrium, 61, 6768 Tariffs, 500501
Silvestre, Jacquim, 544n Steady-state income, 82 Taussig, Frank, 507
Simple economy, 3031 Steady-state output and investment, Taxation
Sims, Christopher A., 191 66 and consumption theory, 338
Singapore Stein, Herbert, 187n distributional effect of inflation,
growth in, 8788 Stein, Jeremy, 428n 168
investment ratio and schooling, 60 Sterilization operations, 512 dynamic scoring, 107
Size-of-government debate, 486487 Sterilized intervention, 526527 effect on marginal propensity to
Skinner, Jonathan S., 342n Stewart, Jimmy, 415 consume, 226227
Slope Sticky real wage, 509 effects on budget surplus, 232233
of aggregate demand schedule, 221 Stiglitz, Joseph, 61n, 376 and housing costs, 380
of consumption function, 216 Stochastic dynamic general of interest, 163n
of IS curve, 248249 equilibrium, 567 investment tax credit, 285
of LM curve, 257 Stock, James H., 156 mortgage interest deduction,
Small time deposits, 393 Stock and flows of capital and 168169
Smith, J., 158 investment, 362, 364373 national differences, 314
Snower, Dennis J., 131n, 160n Stock market proportional income tax, 226
Social infrastructure, 8990 and consumption, 348 and rental cost of capital, 366367
Social returns to capital, 81 and cost of capital, 369370 in supply-side economics, 106108
Social Security, 487490 crash of 1929, 453, 456 Tanzi-Olivera effect, 470n
Edition
612 INDEX
Tax brackets, indexed, 168 Transfer payments, 27, 481 distributional impact, 162
Tax cuts, 189 in current account, 300 in GDP, 145
of 2001, 185, 292293 effect on autonomous spending, 229 offsetting benefits, 162
impact on AS-AD model, 107 effect on income and output, 226 cyclical, 151
Taylor, John B., 129n, 199n, 200, Transitory disturbances, 183185, discouraged workers, 147n, 149
376n 198 and downsizing, 154
Taylor, Mark, 515n, 530n Transitory income, 341342, 343 effect of crowding out, 283
Taylor, Robert, 3 Transitory shocks, 557559 frequency of, 152153
Taylors rule, 210 Transitory supply shock, 137 frictional, 101, 149151
Technical progress Transmission mechanism and insider-outsider models, 131,
and growth, 55 bank lending, 278 159160
measuring, 58 stages, 272273 in Japan, 160
Technological obsolescence, 363 Travelers checks, 392 in Keynesian AS curve, 99
Technological progress Treasury bills, 394, 401402 long-term, in Europe, 160
and favorable supply shocks, 138 compared to S&P 500, 445 misery index, 174
formula, 70 interest rate, 43, 240, 412, offsetting benefits, 162
Technology 428429, 435436 and Okuns law, 132133
in endogenous growth model, and velocity of money, 405 in political business cycle,
8182 Treasury bonds, interest rates, 173174
and environmental protection, 89 435436 poll results, 143
and growth rate, 56 Treasury Department, indexed debt, in recession of 197576, 136
labor-augmenting, 69, 71 169 in recessions, 15
Technology growth formula, 82 Trend, 556 search, 153
Teenage unemployment, 149, 150, Trend path of real GDP, 1415 signal of long-term, 156
157 Trend stationary variable, 557 in stagflation, 122123
in Europe, 160 Trend stationary with breaks, 559 Unemployment benefits, 157161
Teenage wages, 157 Trough, 14 as automatic stabilizer, 187, 228
Temin, Peter, 459n Tversky, Amos, 396n effect on natural rate, 161
Temple, Jonathan, 77n Two-sector growth models, 8384 and employment stability, 160
Term premium, 437 in Europe, 157160
Term structure of interest, 435 U experience rating, 160
equation, 437 Ultimate targets, 194, 430 increasing unemployment, 157
expectations theory, 437, 438 Unanticipated inventory investment, reporting effects, 161
Terrorist attack of 2001, 186 382383 Unemployment gap, 118, 132133
Thatcher government, 471 Uncertainty Unemployment hysteresis, 156
Thornton, Daniel, 424n about economic models, 191192 Unemployment-output relation, 145
Tight money policy, 290 and buffer-stock saving, 347348 Unemployment pool, 148149
Time deposits, 393 consumption under, 344348 Unemployment rate
Timing of investment, 373377 over duration of disturbances, by age, sex, and race 19482002,
Tinsley, P. A., 190 182185 150
Tobin, James, 3, 156n, 171, 387n, inflation expectations, 124 constant-growth-rate rule, 198199
400 and policies, 191194 definition, 42
Topel, Robert, 147n in policy formulation, 183184 at full employment, 234
Tornell, Aaron, 506n reaction to policy, 189 in Great Depression, 453
Total factor productivity, 55, 70 reasons for, 189192 versus inflation rate, 1011
in Asian Tigers, 8788 Uncovered interest parity, 447 increased by benefits, 157
Solow residual, 58 Unemployed person, 147 international perspective, 158159
Total incomes system of accounts, Unemployment; see also Inflation- reasons for changes, 149
28n unemployment trade-off; in recession of 1970s, 288
Total transactions, 404n Natural rate of recession of 198182, 196
Townsend, Robert M., 347n unemployment; Phillips curve in recession of 199091, 292
Toyota Motors, 510 actual and notional rates, 155 reporting effects, 161
Tract on Monetary Reform (Keynes), anatomy of, 147152 of teenagers, 157
467n cyclical unemployment, 149151 in United States 19602000,
Trade balance, 300, 315 duration, 151152 116117
depreciation-induced, 327 frictional unemployment, in United States 19611969, 119
J-curve effect, 510511 149151 in United States 19612002, 121
Trade balance equilibrium schedule, key characteristics, 147 in United States 19722002, 289
498 reasons for, 148 United States and Japan, 4243
Trade deficit, 3233, 498 terminology, 147148 variations across groups, 149
Trade linkage, 299300 unemployment pool, 148149 Unexpected inflation, 146
Trade surplus, 3233 variation across groups, 149 Union labor contracts; see Labor
Transaction costs, 398399 costs of, 16, 144 contracts
Transactions demand for money, cyclical, 161162 United Kingdom
397399 distributional consequences, devaluation in, 303, 500
Baumol-Tobin model, 409410 145146 in Great Depression, 458
Edition
INDEX 613
indexed bonds, 169 recession in 199091, 196, responsiveness to

Phillips curve for, 118 428429 unemployment, 118
working age/retirement age trade linkages, 299300 in simple Phillips curve, 117120
population, 488 unemployment rate, 42 of teenagers, 157
United States unemployment rate 19482002, 150 Wage-setting, 129130
actual and potential output, 16 unemployment rate 19602000, Wage stickiness, 509
asset/liability positions, 166167 116117 assumptions, 126127
balance of payments 19972002, unemployment rates 19602003, contracts and long-term
300 158, 159 relationships, 128130
budget deficits, 230 unit labor costs, 521 coordination problems, 127128
budget deficits of 1980s, 480 weakening economy in efficiency wage theory, 128
budget surplus, 230231 20012002, 269 imperfect information on, 127
changes in disposable income, working age/retirement age insider-outsider models, 131
335336 population, 488 and market clearing, 127
changes in real per capita Unit labor costs, 521 reasons for, 126
consumption, 335336 Unit of account, 395 Wakefield, J. C., 234n
composition of GDP, 24 Unskilled labor costs, 132 Wallace, Neil, 189n
composition of savings, 354 Unstable equilibrium, 86 Warner, Andrew M., 59n
consumption share of GDP, 26 Uzawa, Hirofumi, 61n Wascher, William, 157
debt-income ratio, 485 Watson, Mark W., 156, 542n
devaluation in, 500 V Wealth redistribution by inflation,
disinflation, 471 Value added, 35 164168
dollar price levels, 508 Vault cash, 416 Webb, Steven, 466n
duration of unemployment Vegh, Carlos A., 467n, 473 Weil, David, 59, 85n
2000/2002, 152 Velasco, Andrs, 506n Weinberg, Daniel, 167n
economic data sources, 46 Velocity of money, 103, 404405, Wells, M., 36n
effect of fiscal/monetary 462 Whalen, Edward H., 399n
expansion, 326, 327 Vertical LM curve, 278279 Wicker, Elmus, 473
Fed funds rate, 522 Very long-run growth theory, 4, 56 Wilcox, David W., 4041, 347n, 428n
GDP 18202000, 5354 Volcker, Paul, 196197, 525n Williams, John C., 156n
GDP growth, 11 Wolfers, Justin, 158n
GDP in 2000, 22 W Wolman, Alexander L., 202n
Great Depression in, 453458 Wage-employment relationship, Working age population, 488
inflation and unemployment 126131 World Bank, 46
19611969, 119 Wage indexation World Development Indicators,
inflation rate 19602000, 1617 cost-of-living adjustments, 170 8889
inflation/unemployment problems with, 171 World production in Great
19612002, 121 and supply shocks, 170171 Depression, 458
interest rates 20002002, 412 Wage inflation, 117118, 120121 World Trade Center attack, 186
investment ratio and schooling, 60 Wage-price adjustments, 128130 World Trade Organization, 500501
Japans convergence with, 5657 Wage-price spiral, 509 Wrase, Jeffrey M., 44n
labor force and unemployment Wages; see also Nominal wage; Real Wren-Lewis, S., 532
2002, 148 wage Wright, Randall, 160n
labor force in 2002, 147 adjusting to demand, 129
monetary policy 1980s90s, in aggregate supply curve, Y
196197 132134 Yellen, Janet L., 128n, 151n,
money growth and inflation in augmented Phillips curve, 564, 566
19602000, 463 120124 Yield curve, 438, 439
net exports 19602002, 29 efficiency wage theory, 128, 130 Young, Alwyn, 77n, 87
output per worker, 6465 and euro, 305
per capita GDP 18902001, 5 flexibility of, 509 Z
per capita GDP 2000, 22 indexed to price level, 129n Zarnovitz, Victor, 291n
price level increase 19722002, and labor supply, 562 Zeldes, Stephen P., 342n, 490n
164165 in nominal terms, 129 Zero balance of payments, 322
ratio of inventories to sales, 381 in real business cycle theory, 543 Zero interest rate, 274275
real exchange rate, 520 reservation wage, 157 Zero population growth, 85, 488

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DornbuschFischerStartz: Back Matter Index The McGrawHill

Macroeconomics, Ninth Companies, 2004

A in explanation of Great Depression, lines vs. curves, 114

Employers unemployment benefits, 157160 Expectations-augmented aggregate

national comparisons 18202000, national comparisons, Hooke, Robert, 83

Income, continued monetary policy in 1980s90s, rational expectations revolution,

lagged adjustment, 401 International Monetary Fund, 501 kinds of opportunities, 84

IS curve, continued Jevons, W. Stanley, 395n as human capital, 28

liquidity constraint and myopia, M Marginal propensity to save, 217

Monetary expansion in recession of 199091, 290291 Money stock

equation, 223 and short-run Phillips curve, in Germany, 294295

and uncertainty, 191194 Position and output rise, 552555

Rankin, Neil, 544n Real wage, 120 Retained earnings, 373374

indexed bonds, 169 recession in 199091, 196, responsiveness to

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