Monetary Policy, Business Fluctuations, and Economic Growth

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This project is part of a large body of research into the behavior of such macroeconomic aggregates as inflation, unemployment and economic growth. The project consists of three parts. The first part continues the development and empirical testing of a theory of monetary policy in which the central bank targets nominal interest rates. Preliminary empirical results for the post-World War II period for the U.S., where interest- rate targeting seems especially to apply, show the theoretical hypotheses match up well with the behavior of money, prices, and interest rates. The project extends the theory and tests the model on pre-World War I data for the U.S., a period when interest-rate targeting did not apply because the U.S. was on the gold standard. It also applies the model to a long history of British data stretching from the early 1700s through the present. The second part deals with the persistence of unemployment, which has been pronounced in recent years. A time-series approach is used to assess the extent of this persistence in various countries over various time periods. These measures of persistence are related to variables that an economic model says should matter for the economy's speed of adjustment. Preliminary results suggest some effects from unionization, the form of labor bargaining, and the size of government. Further research focuses on the empirical side, especially on the role of restrictions on firing and hiring in the labor market. The third part concerns extensions of models of endogenous economic growth developed under the previous grant. The project merges analyses of population growth with recent theory of technological progress. These models show how long-term growth rates depend on such variables as government policies, natural resources and rates of time preferences. These theories are utilized to explain some differences in growth performances across countries. This ambitious agenda is important from both a scientific and policy perspective. Scientifically, the project contributes new theories of monetary policy, unemployment and economic growth. The theory of economic growth is especially exciting because it synthesizes work in labor economics, technological change and macroeconomics. This new theory not only will provide a more powerful and general way of studying overall economic performance, but it enriches different fields of economic research by drawing them together. The project also addresses timely policy issues such as the appropriateness of interest-rate targeting and the effectiveness of different unemployment policies.