Fourth Edition. University of California, Berkeley

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1 Fourth Edition University of California, Berkeley

2 Introduction Chapter 1 Chapter 2 Chapter 3 Chapter 4 Chapter 5 Chapter 6 Chapter 7 Chapter 8 Chapter 9 Chapter 10 Chapter 11 Chapter 12 Epilogue References Indexes THE SOLOW GROWTH MODEL INF8NITE-HQR1ZQN AND QVERLAPPBNG-GENERATBQNS MODELS ENDOGENOUS GROWTH CROSS-COUNTRY BNCOME DBFFERENCES REAL-BUSINESS-CYCLE THEORY NOMBNAL RBG1DBTY DYNAMDC STOCHASTIC GENERAL- EQU1LIBRBUM MODELS OF FLUCTUATIONS CONSUMPTION INVESTMENT UNEMPLOYMENT INFLATION AND MONETARY POLICY BUDGET DEFICITS AND FISCAL POLBCY THE FINANCIAL AND MACROECONOMIC CRISIS OF 2008 AND BEYOND IX

3 Preface to the Fourth Edition xix Introduction 1 Chapter 1 THE SOLOW GROWTH MODEL Some Basic Facts about Economic Growth Assumptions The Dynamics of the Model The Impact of a Change in the Saving Rate Quantitative Implications The Solow Model and the Central Questions of Growth Theory Empirical Applications The Environment and Economic Growth 37 Problems 45 Chapter 2 INFBNITE-HORIZON AND OVERLAPPING-GENERATIONS MODELS 49 Part A THE RAMSEY-CASS-KOOPMANS MODEL Assumptions The Behavior of Households and Firms The Dynamics of the Economy Welfare The Balanced Growth Path The Effects of a Fall in the Discount Rate The Effects of Government Purchases 71 Part B THE DIAMOND MODEL Assumptions Household Behavior The Dynamics of the Economy 81 xi

4 xii CONTENTS 2.11 The Possibility of Dynamic Inefficiency Government in the Diamond Model 92 Problems 93 Chapter 3 ENDOGENOUS GROWTH Framework and Assumptions The Model without Capital The General Case The Nature of Knowledge and the Determinants of the Allocation of Resources to R&D The Romer Model Empirical Application: Time-Series Tests of Endogenous Growth Models Empirical Application: Population Growth and Technological Change since 1 Million B.C Models of Knowledge Accumulation and the Central Questions of Growth Theory 143 Problems 145 Chapter 4 CROSS-COUNTRY INCOME DIFFERENCES Extending the Solow Model to Include Human Capital Empirical Application: Accounting for Cross-Country Income Differences Social Infrastructure Empirical Application: Social Infrastructure and Cross-Country Income Differences Beyond Social Infrastructure Differences in Growth Rates 178 Problems 183 Chapters REAL-BUSINESS-CYCLE THEORY Introduction: Some Facts about Economic Fluctuations An Overview of Business-Cycle Research A Baseline Real-Business-Cycle Model Household Behavior A Special Case of the Model Solving the Model in the General Case 207

5 CONTENTS xiii 5.7 Implications Empirical Application: Calibrating a Real-Business- Cycle Model Empirical Application: Money and Output Assessing the Baseline Real-Business-Cycle Model 226 Problems 233 Chapter 6 NOMINAL R5GBDBTY 238 Part A EXOGENOUS NOMINAL RIGIDITY A Baseline Case: Fixed Prices Price Rigidity, Wage Rigidity, and Departures from Perfect Competition in the Goods and Labor Markets Empirical Application: The Cyclical Behavior of the Real Wage Toward a Usable Model with Exogenous Nominal Rigidity 255 Part B MICROECONOMIC FOUNDATIONS OF INCOMPLETE NOMINAL ADJUSTMENT A Model of Imperfect Competition and Price-Setting Are Small Frictions Enough? Real Rigidity Coordination-Failure Models and Real Non- Walrasian Theories The Lucas Imperfect-Information Model Empirical Application: International Evidence on the Output-Inflation Tradeoff 302 Problems 306 Chapter 7 DYNAMIC STOCHASTBC GENERAL- EQUILIBRBUM MODELS OF FLUCTUATBONS Building Blocks of Dynamic New Keynesian Models Predetermined Prices: The Fischer Model Fixed Prices: The Taylor Model The Calvo Model and the New Keynesian Phillips Curve 329

6 xiv CONTENTS State-Dependent Pricing Empirical Applications Models of Staggered Price Adjustment with Inflation Inertia The Canonical New Keynesian Model Other Elements of Modern New Keynesian DSGE Models of Fluctuations Problems Chapter 8 CONSUMPTION Consumption under Certainty: The Permanent- Income Hypothesis Consumption under Uncertainty: The Random- Walk Hypothesis Empirical Application: Two Tests of the Random- Walk Hypothesis The Interest Rate and Saving Consumption and Risky Assets Beyond the Permanent-Income Hypothesis 389 Problems 398 Chapter 9 BNVESTMENT Investment and the Cost of Capital A Model of Investment with Adjustment Costs Tobin's q Analyzing the Model Implications Empirical Application: q and Investment The Effects of Uncertainty Kinked and Fixed Adjustment Costs Financial-Market Imperfections Empirical Application: Cash Flow and Investment 447 Problems 451 Chapter 10 UNEMPLOYMENT Introduction: Theories of Unemployment A Generic Efficiency-Wage Model A More General Version 463

7 CONTENTS XV The Shapiro-Stiglitz Model Contracting Models Search and Matching Models Implications Empirical Applications Problems iter 1 1 INFLATION AND MONETARY POLICY 513 n.i Inflation, Money Growth, and Interest Rates Monetary Policy and the Term Structure of Interest Rates The Microeconomic Foundations of Stabilization Policy Optimal Monetary Policy in a Simple Backward- Looking Model Optimal Monetary Policy in a Simple Forward- Looking Model Additional Issues in the Conduct of Monetary Policy The Dynamic Inconsistency of Low-Inflation Monetary Policy Empirical Applications Seignorage and Inflation Problems ter BUDGET DEFICITS AND FBSCAL POLICY The Government Budget Constraint The Ricardian Equivalence Result Ricardian Equivalence in Practice Tax-Smoothing Political-Economy Theories of Budget Deficits Strategic Debt Accumulation Delayed Stabilization Empirical Application: Politics and Deficits in Industrialized Countries The Costs of Deficits A Model of Debt Crises Problems

8 xvi CONTENTS Epilogue THE FINANCIAL AND MACROECONOMBC CRBSBS OF 2008 AND BEYOND 644 References 649 Author Index 686 Subject index - 694

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