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A dataset comprising 38 countries and relatively long sample periods, which extend in some cases to over a century, is used to study the behavior of long-run demand for M1. For a large majority of the countries, the evidence supports the existence of a stable long-run relationship between the ratio of M1 to GDP and a short-term interest rate. The log-log specification provides a good characterization of the data, with the exception of periods featuring very low interest rates. An extension of the theory that imposes limits on the amount households can borrow results in a truncated log-log specification, which is in line with what we observe in the data. We estimate the interest rate elasticity to be between 0.3 and 0.6.

We develop a theory of career paths and earnings where agents organize in production hierarchies. Agents climb these hierarchies as they learn stochastically from others. Earnings grow as agents acquire knowledge and occupy positions with more subordinates. We contrast these and other implications with US census data for the period 1990 to 2010, matching the Lorenz curve of earnings and the observed mean experience-earnings profiles. We show the increase in wage inequality over this period can be rationalized with a shift in the level of the complexity and profitability of technologies relative to the distribution of knowledge in the population. (JEL D83, E24, J24, J31)

We review new theories of learning that posit specific, distinct roles for the learner or innovator and their intellectual environment. We consider applications to the dynamics of individual earnings over the life cycle, the diffusion of knowledge within an organization and firm dynamics, and the role of trade in the diffusion of ideas.

At some point in the first half of the 19th century per capita GDP in the United Kingdom and the United States began to grow at something like one to two percent per year and have continued to do so up to the present. Now incomes in many economies routinely grow at 2 percent per year and some grow at much higher “catch-up” rates. These events surely represent a historical watershed, separating a traditional world in which incomes of ordinary working people remained low and fairly stable over the centuries from a modern world where incomes increase for every new generation. This paper uses Gary Becker’s theory of a “quantity/quality trade-off,” consistent both with Malthusian population dynamics (quantity) and with demographic transition (quality), to identify a limited set of forces that were central to this revolution.

We show that regulatory changes that occurred in the banking sector in the early 1980s, that considerably weakened Regulation Q, can explain the apparent instability of money demand starting in the same period. We evaluate the effects of the regulatory changes using a model that goes beyond aggregates as M1 and treats currency and different deposit types as alternative means of payments. We use the model to construct a new monetary aggregate that performs remarkably well for all the period 1915–2012.

An intergenerational model is developed, nesting heritable earning abilities and credit constraints limiting human capital investments in children. Estimates on a large, Finnish data panel indicate very low transmission from parental earnings, suggesting that the parameter of inherited earning ability is tiny. Family income, particularly during the phase of educating children, is shown to be much more important in shaping children’s lifetime earnings. This influence of parental incomes on children’s earnings rises as the children age because the returns to education rise. Despite Finland’s well-developed welfare state, persistence in economic status across generations is much higher than previously thought.

This is the Commencement Address delivered at the University of Chicago on December 9, 1988.

This paper introduces and partially develops a new model of endogenous technological change, viewed as the product of a class of problem-solving producers. The model, based on earlier work by Eaton and Kortum, is built up from the premise that all knowledge resides in the head of some individual person and the knowledge of a firm, or economy, or any group of people is simply the knowledge of the individuals that comprise it. The model is applied to an economy with a cohort structure. A calibration of the model using cross-section earnings data, in addition to aggregate GDP growth, is considered. What is it about modern capitalist economies that allows them, in contrast to all earlier societies, to generate sustained growth in productivity and living standards? It is widely agreed that the productivity growth of the industrialized economies is mainly an ongoing intellectual achievement, a sustained flow of new ideas. Are these ideas the achievements of a few geniuses, Newton, Beethoven and a handful of others, viewed as external to the activities of ordinary people? Are they the product of a specialized research sector, engaged in the invention of patent-protected processes over which they have monopoly rights? Both images are based on important features of reality and both have inspired interesting growth theories, but neither seems to me central. What is central, I believe, is the fact that the industrial revolution involved the emergence (or rapid expansion) of a class of educated people, thousands - now many millions - of people who spend entire careers exchanging ideas, solving work-related problems, generating new knowledge. In this paper I introduce and partially develop a new model of technological change, viewed as the product of a class of problem-solving producers. The model is built up from the premise that all knowledge resides in the head of some individual person, so that the knowledge of a firm, or economy, or any group of people is simply a list of the knowledge of its members. A main feature of the model will be the social or reciprocal character of intellectual activity: Each person gains from the knowledge of the people around him; his ideas in turn stimulate others.1 As we will see, this idea is very flexible, but to develop it we need to have a tractable mathematical idealization of an individual's knowledge, of the relation of this knowledge

This paper proposes a model to describe the evolution of real gross domestic product (GDP) in the world economy that is intended to apply to all open economies. The parameters of the model are calibrated using evidence from Sachs and Warner on economies classed as open, from Parente and Prescott on economies that have successfully begun to develop, and from Kuznets and the World Bank on the employment share of agriculture in various times and places. The theory predicts convergence of the income levels and growth rates in the open economies and has strong but reasonable implications for transition dynamics. (JEL F41, O33, O47)

We study a variation of the Eaton–Kortum model, a competitive, constant-returns-to-scale multicountry Ricardian model of trade. We establish existence and uniqueness of an equilibrium with balanced trade where each country imposes an import tariff. We analyze the determinants of the cross-country distribution of trade volumes, such as size, tariffs and distance, and compare a calibrated version of the model with data for the largest 60 economies. We use the calibrated model to estimate the gains of a world-wide trade elimination of tariffs, using the theory to explain the magnitude of the gains as well as the differential effect arising from cross-country differences in pre-liberalization tariff levels and country size.

This paper develops a model of a monetary economy in which individual firms are subject to idiosyncratic productivity shocks as well as general inflation. Sellers can change price only by incurring a real menu cost.' We calibrate this cost and the variance and autocorrelation of the idiosyncratic shock using a new U.S. data set of individual prices due to Klenow and Kryvtsov. The prediction of the calibrated model for the effects of high inflation on the frequency of price changes accords well with the Israeli evidence obtained by Lach and Tsiddon. The model is also used to conduct numerical experiments on the economy's response to credible and incredible disinflations and other shocks. In none of the simulations we conducted did monetary shocks induce large or persistent real responses.

I was very pleased to be asked to provide an introduction to this volume in honor of Edward C. Prescott. There is a sense in which all of us working in macroeconomics today honor Ed Prescott in every paper we write, so great has been his influence on the way we conceive and carry out our research. This was the theme of some comments I gave at a 1993 conference in Louvain honoring Kenneth Arrow, Gerard Debreu, and Lionel McKenzie for their work 25 years earlier on the general theory of competitive equilibrium. I will begin by reproducing these remarks, and then conclude with some additional thoughts.

Trends in intergenerational economic mobility in Finland are analyzed using panel data from 1950 through 1999 on more than 250,000 sons and daughters born between 1930 and 1970. A significant decline is estimated in the intergenerational transmission elasticity from the 1930 birth cohort until the baby boom cohorts of the early 1950s. After that we observed no increase in the extent of mobility for 1950s and 1960s birth cohorts, but rather the reverse. The result holds both for sons and daughters. A decomposition of the intergenerational transmission elasticities across cohorts shows that most of the early decline in transmission reflected a drop in the influence of parental income on the children's earnings that operated through investments in the child's schooling. This early pattern is postulated to reflect the phases of secondary educational expansion at the time. Throughout, a rise is estimated in the intergenerational transmission elasticity with age at which sons and daughters are observed. This has also been noted in prior U.S. studies and, at least in this Finnish context, this seems to result almost entirely from rising estimated returns to education with age.

In this issue, geography, market integration and institutions are identified as the fundamental constraints on Africa's future prosperity. It is pointed out that, in line with the recommendations of The Report of the Commission for Africa, African governments and international partners can ameliorate the effects of these constraints through: investing in governance, peace and security; improving the investment climate by articulating and implementing suitable policies; improving the infrastructure; diversifying the economic base; and removing trade and non-trade barriers to intra-African trade as well as Africa's beneficial integration into the global economy. Also in this issue, the point is made that the widening gaps between Africa's economies and those of the industrialized nations contribute to the high levels of migration from Africa to the developed world. It is concluded that the developed nations need to support Africa's resurgence in order to reduce the poverty levels and improve economic growth prospects in Africa thereby reduce the pressure on the developed countries to control the influx of (unwanted) low skilled Africans to their countries, save them the cost and consequences of preventing the surge, and ameliorate other negative externalities associated with such migrants. Supporting Africa's resurgence will ensure that Africa does not lag behind yielding the associated benefit of reduced pressure for skilled and unskilled persons to migrate out of Africa and avoidance of perverse spatial distribution of people; the consequences of which can only be imagined. Copyright 2006, Oxford University Press.

I have mixed feelings about Bob Byrd1 saying he’s looking forward to receiving my papers. He’s probably only going to get them when I’m gone: I don’t seem to be able to give up anything out of my file drawers. But when that does happen, my papers will be in the best library for the history of economic thought they can find anywhere, so they will have a happy home. Well, I’m not here to tell people in this group about the history of monetary thought. I guess I’m here as a kind of witness from a vanished culture, the heyday of Keynesian economics. It’s like historians rushing to interview the last former slaves before they died, or the last of the people who remembered growing up in a Polish shtetl. I am going to tell you what it was like growing up in a day when Keynesian economics was taught as a solid basis on which macroeconomics could proceed. My credentials?Was I a Keynesian myself?Absolutely. And does my Chicago training disqualify me for that? No, not at all. David Laidler [who was present at the conference] will agree with me on this, and I will explain in some detail when I talk about my education. Our Keynesian credentials, if we wanted to claim them, were as good as could be obtained in any graduate school in the country in 1963. I thought when I was trying to prepare some notes for this talk that people attending the conference might be arguing about Axel

This paper is a theoretical study of rural‐urban migration—urbanization—as it has occurred in many low‐income economies in the postwar period. This process is viewed as a transfer of labor from a traditional, land‐intensive technology to a human capital–intensive technology with an unending potential for growth. The model emphasizes the role of cities as places in which new immigrants can accumulate the skills required by modern production technologies.

Factors shaping international migration, over the last half century, from and into the countries and territories of sub-Saharan and North Africa, as well as the economic and some social implications of those movements, are examined. Existing analyses of these issues are critically reviewed, including topics particularly pertinent to the African context and evidence on cross-cutting themes studied in the African context. The most recent data available on each aspect are summarized and fresh results, based on these data, are presented on several topics.

We prove the existence of a symmetric equilibrium in a circular city in which businesses and housing can both be located anywhere in the city. In this equilibrium, firms balance the external benefits from locating near other producers against the costs of longer commutes for workers. An equilibrium city need not take the form of a central business district surrounded by a residential area. We propose a general algorithm for constructing equilibria, and use it to study the way land use is affected by changes in the model's underlying parameters.

Analysis of a new Mexican database reveals that air-borne, suspended particulate emissions per employee by plants with 20 or less employees are significantly greater than by larger plants within the same manufacturing sector. From a second, new data set on manufacturing plants in Brazil, it is shown that industry in lower-income areas displays a higher concentration of the dirtiest industrial sectors and of smaller plants (which are dirtier). However, harm to humans from industrial air pollution in Brazil is found to be greater in higher-income areas and most of this harm derives from larger plants. This is not simply a reflection of the greater prevalence of manufacturing in urban areas, for the rising projections of human mortality among higher wage municipalities hold, even controlling for population density. Resolution of this apparent paradox hinges on the distinction between emission intensities and total emissions, the latter determining the level of harm, a distinction that has not always been made clear in the course of debate.

Robert E. Lucas, Jr.:' The January 2002 issue of the Atlantic contains an article by Benjamin Schwarz and Christopher Layne called "A New Grand Strategy." The article deplores the role of the United States in the Middle East, which the authors interpret as derived from a perceived need to ensure the availability of oil from that region. As the authors observe, "America derives most of its oil from Alaska, Canada, the continental United States, Mexico, and Venezuela. About 25 percent of U.S. petroleum imports come from the Persian Gulf. If the United States adopted a national energy strategy it could free itself from dependence on Persian Gulf oil" (p. 37). They go on to advocate doing this, and leaving Middle East politics to other, still dependent powers. They explain: "The role the United States has assigned itself in the Persian Gulf has made it-not Japan, not the states of Western Europe, not China-vulnerable to a backlash" (p. 38). The Schwarz and Layne article is a good example of what W. Lee Hansen et al. (2002 [preceding paper, this issue]) call "economic illiteracy." Its entire argument is based on the market for oil, but the authors do not have even an Economics 101 understanding of what a market is. They construct a vision of a new U.S. foreign policy based on a wholly arbitrary matching up of particular buyers of a homogeneous good with particular sellers of the good. We will exercise hegemony in Mexico and Venezuela, they say, and let the Japanese take care of the Middle East. The example illustrates three points emphasized in "Use It or Lose It: Teaching Literacy in the Economics Principles Course" (this issue, preceding paper). First, economic illiteracy often is an affliction of the well-educated: Schwarz and Layne are articulate experts in foreign affairs. Second, economic illiteracy can be dangerous: there is more at stake than bad answers to our exam questions. Third, the ignorance involved is not ignorance of the research tools of technical economics. It should not be necessary to be handy with fixed-point theorems in order to avoid mistakes like the one Schwarz and Layne make. "Use It or Lose It" has two main theses. The first is that we can and should promote economic literacy by redesigning the first collegelevel economics course (one semester) to teach principles, not methods. The second is that we can use a list of 20 "Content Standards" provided by the National Council on Economic Education to define what it means to teach principles. I have misgivings about both these theses, to which I turn in a moment. I must say at the outset, though, that my criticism will be almost entirely nonconstructive: I agree that introductory economics needs to be reinvented, but I do not claim to know how to do it. In criticizing introductory economics courses and textbooks, the authors lament the increasingly technical nature of the course and cite others who share this view. Nostalgia is expressed (in a quote from McConnell, not a direct statement by these authors) for a 1946 text of Frank Taussig's that predates even my ancient training by 15 years! It would be hard to think of a surer way to discourage the most able students from pursuing a career in economics than to offer them a 50-year-old textbook on the grounds that P. J. O'Rourke did not like graphs. Imagine proposing such a thing to an association of physicists or chemists or, for that matter, musicologists! Knowledge is cumulative-a fact that should make us happy, not sad. One of our jobs as teachers is to help our most eager and creative students get to the knowledge frontier as fast as they want to go. In the natural sciences and the arts, introductory courses are professionally oriented basic-training courses on which one can build a creative career. Economics students deserve as much. The problem with leaving the matter at this is that introductory science courses tend to be useless for nonmajors. Indeed, levels of physics literacy, chemistry literacy, and musical literacy among well-educated people are in no better shape than economics literacy. This is the classic case against letting each student design his 'Department of Economics, University of Chicago, 1126 East 59th St., Chicago, IL 60637.

This Handbook summarizes the state of thinking and presents new evidence on various links between international migration and economic development, with particular reference to lower-income countries. The connections between trade, aid and migration are critically examined through global case studies.

Over the last two decades a substantial, empirical literature has explored the links between bilateral migration and bilateral trade. Limitations on migration data have meant that the bulk of this evidence pertains only to immigrants into and trade with the OECD countries. Even within this category there is little consensus in the prior findings. This chapter adopts the recently available Global Bilateral Migration Database to explore the trade links, both with immigration and emigration, between 192 countries from 1960 to 2000, with a particular emphasis on the developing countries. Findings include positive emigrant and immigrant links with trade in all four pairings of lower-income and higher-income countries, including south-south trade. In contrast to prior findings it is estimated that the elasticity of this association increases with the level of migration over substantial ranges. The elasticity is also shown to be highest for the highly educated (at least among OECD immigrants), higher for females than males and positive for refugees who have fled from one lower-income country to another. The links prove weaker where the trade partners share a common language or colonial heritage, suggesting a role for migrants in over-coming lack of familiarity and associated incomplete information. Reduction in such barriers promotes openness to trade with a gain in efficiency, but the two-way effects offset, such that the balance of trade for lower-income countries may actually deteriorate. Network effects of third-country nationals is also explored and extended to include mutual emigration to third countries, which is estimated to result in trade diversion.

The earnings premium received by African, urban, male union members in South Africa, as compared to other regular, urban male employees, is explored using two national sample surveys conducted in 1985 and 1993. The historical setting of this change is of particular interest, in the light of the transformation from the apartheid regime. Union membership grew very rapidly during this interval, as earlier prohibitions on African unions were lifted. Subsequently, the high rates of unemployment and segmentation of the labor force have been issues of central concern to the new government, elected in 1994. In this context, the paper extends prior methodology, by systematically comparing possible approaches to estimation, in addition to contributing fresh empirical results. Four approaches to estimation are adopted, allowing for: a single earnings regime with union dummy variable; the possibility of different earnings regimes among union members as compared to non-members; endogenous switching between such regimes; sample selection arising from lack of employment and from division between regular and informal work. A series of tests on nested specifications indicate the importance of recognizing endogenous switching between differing pay structures in the covered and uncovered sectors. However (as with previous research on the South African labor market), no sample selection is detected with respect to employment status. The results suggest that collective bargaining resulted in wage compression among the expanding union membership while significantly widening the gap between members and non-members. The latter widening gap cannot be attributed to the changing composition of union membership as reflected in observed characteristics of employees.

There is an elegant geometric theory of cities that describes the location of activities and the equilibrium pattern of land prices. In the simplest versions of the theory, production is centered at the city center, and people live at differing distances from their jobs. In choosing a residential location, households face a tradeoff between expensive land near the center with small travel times, and cheap land farther out with large travel costs. Everyone who has looked for housing in any city or suburb knows the reality of this tradeoff. The objective of this paper is to rework the model of a city with a spatial structure imposed on the production externality: The effect of one producer on the productivity of another is assumed to be a decreasing function of the distance between the two. By itself, this postulated force will pull producers together, or pull all of them toward a point I designate the center. The need for land as a factor of production will keep the city from collapsing on this point. The tension between these two factors will generate a land price gradient in equilibrium. (Copyright: Elsevier)

In a monetary economy, it is in everyone’s private interest to try to get someone else to hold non-interest-bearing cash and reserves. But someone has to hold it all, so these efforts must simply cancel out. All of us spend several hours per year in this effort, and employ thousands of talented and highly-trained people to help us. These person-hours are simply thrown away, wasted on a task that should not have to be performed at all.

This note describes a numerical simulation of a model of economic growth, a simplified version of Robert Tamura's (1996) model of world income dynamics, based on technology diffusion. The model makes predictions for trends in average world income growth and about the evolution of the relative income distribution that accord well with observation. The model is used to forecast the course of world income growth and income inequality over the century to come.

This article is based on the author’s Homer Jones Memorial Lecture delivered at the Federal Reserve Bank of St. Louis, April 2, 2014.

We provide a model where freer trade has persistent, positive eects on productivity, beyond the standard reallocation eciency gains. We add to a traditional Ricardian model a theory of diusion of ideas, which themselves determine productivity. Ideas dif

We provide a theoretical description of a process that is capable of generating growth and income convergence among economies, and where freer trade has persistent, positive effects on productivity, beyond the standard efficiency gains due to reallocation effects. We add to a standard Ricardian model a theory of endogenous growth where the engine of growth is the flow of ideas. Ideas are assumed to diffuse by random meetings where people get new ideas by learning from the people they do business with or compete with. Trade then has a selection effect of putting domestic producers in contact with the most efficient foreign and domestic producers. We analyze the way that trade in goods, and impediments to it, affect this diffusion. We find that exclusion of a country from trade reduces productivity growth, with large long-term effects. Smaller trade costs have moderate effects on productivity.

This paper describes the efficient allocation of consumption and work effort in an economy in which workers face idiosyncratic employment risk and considerations of moral hazard prevent full insurance. We impose a lower bound on the expected discounted utility that can be assigned to any agent from any date onward and show, with this feature added, that the efficient unemployment insurance scheme induces an invariant cross-sectional distribution of individual entitlements to utility. The paper thus provides a simple prototype model suited to the study of the normative question: what is the trade-off between equality and efficiency in resource allocation? Journal of Economic Literature Classification Numbers: D31, D63, D82, J65.

We analyze a model economy with many agents, each with a different productivity level. Agents divide their time between two activities: producing goods with the production-related knowledge they already have, and interacting with others in search of new, productivity-increasing ideas. These choices jointly determine the economy's current production level and its rate of learning and real growth. Individuals' time allocation decisions depend on the knowledge distribution because the productivity levels of others determine their own chances of improving their productivities through search. The time allocations of everyone in the economy in turn determine the evolution of its knowledge distribution. We construct the balanced growth path for this economy, thereby obtaining a theory of endogenous growth that captures in a tractable way the social nature of knowledge creation. We also study the allocation chosen by an idealized planner who takes into account and internalizes the external benefits of search, and tax structures that implement an optimal solution. Finally, we provide two examples of alternative learning technologies, as concrete illustrations of other directions that might be pursued.

This paper extends the work in Alvarez, Buera, and Lucas (2007) to a collection of open economies linked by trade flows. We model the technology of an economy as described by a probability distribution of available costs --– in the sense of labor or other resource requirements --– for producing different goods. Following Kortum (1997), we call such a distribution a technology frontier. An individual potential producer is characterized by his current cost level --– a random variable drawn from the frontier distribution –-- and is also subject to a stochastic flow of new ideas –-- new cost levels. When he receives a cost idea that is better than the one he is able to produce with he adopts it and this new cost becomes his state. If he receives a higher cost idea, or no idea at all, his cost state remains unchanged. The flow of new ideas-new cost levels are random draws from the distribution of sellers to the market where a potential producer is located. As in Eaton and Kortum (2002), the distribution of sellers to a particular market is a function of the world technology frontier, the matrices of trade costs and trade barriers, and the world-wide vector of factor prices. We show that the evolution of the world technological frontier can be described by a system of delay differential equations, and present an algorithm that can be used to solve for the world technological frontier. We present numerical examples where trade barriers lead to a worse distribution of ideas, in that the technology frontier in a world with high trade barriers is stochastically dominated but the technology frontier in a world with low trade barriers.