Volume 7, Issue 1, November 2005
The Research Agenda: Fabrizio Zilibotti on the Equilibrium
Policies and Institutions
Modern macroeconomics studies the effects of economic policies on economic
performance over time. Policies are not exogenous, however. They reflect
aggregation of preferences of those agents who, in a society, are
with political rights. Such preferences vary across social groups and over
time depending on a number of factors, both economic and non-economic
Among these factors, there are past policies: these shape the evolution of
macroeconomic outcomes as well as of the asset and income distribution
within a society, thereby affecting the future constituency of policies
institutions. The research agenda which I shall describe here focuses on
dynamic interdependence between political and economic equilibrium. I will
focus on fiscal policy and labor market regulations.
Fabrizio Zilibotti is Professor of Economics at Institute for
Economic Studies in Stockholm. He is particularly interested in
macroeconomics, political economy and the evolution of institutions.
Incorporating politico-economic dynamics in general equilibrium macro
entails some analytical difficulties. The standard logic of competitive
models, where agents optimize taking future equilibrium outcomes (e.g.,
prices) as given, breaks down when political choice is considered, since
the current political choice has non-negligible effects on future
and it would be irrational for agents to ignore them. There are two
for tackling this problem. The first is to analyze the set of
dynamic equilibria involving reputation and collective punishments. The
problem with this approach is that such set of equilibria is large.
Moreover, enforcing punishments requires significant coordination among
agents. The alternative approach focuses on Markov Perfect Equilibria
MPE emphasize lack of commitment entailed in democratic political
by focusing on equilibria which are limits of finite-horizon equilibria.
While restricting attention to MPE reduces the number of equilibria, their
characterization is not straightforward. A first generation of papers has
resorted to computational analysis (see, e.g., Krusell and
While useful, this approach entails two major limitations. First,
the complexity of the analysis makes it difficult to transmit its insights
to broad audiences including students and policy-makers, and, second, MPE
often involve discontinuous policy functions which are hard to track even
through numerical methods.
In a series of recent papers with various coauthors, I have tried to
overcome these hurdles, and propose "tractable" dynamic macroeconomic
embedding politico-economic factors. The virtue of small-scale models is
their transparent mechanics. This makes it easy to solve problems
functional equations through guess-and-verify methods, even when
exhibit discontinuous policy functions. The distinctive features of the
theory are that (i) policies are decided through period-by-period voting
without commitment and (ii) they affect asset accumulation decisions. In
this environment, the current political choice affects the future income
distribution, and this, in turn, affects the future political equilibrium.
This dynamic feedback opens the scope for strategic voting: agents vote
taking into consideration how their choice today affects politics
Fiscal Policy and Redistribution
In Hassler, Rodriguez-Mora, Storesletten and Zilibotti (2003), we model an
economy where agents are born identical and make a human capital
Investments have a stochastic return that makes some agents rich while
others remain poor. Since agents are risk-neutral and redistribution has
distortionary effects, the welfare state is socially
"wasteful": if agents could commit ex-ante (i.e., before
knowing the realization of the return to their investment) to a
redistributive policy, they would choose no redistribution. However, such
commitments are not feasible in democracies, and ex-post
determine the political outcome: the poor demand redistribution and a
welfare-state system might be an equilibrium.
The theory offers two main insights. First, if a temporary shock triggers
sufficient support to initiate redistributive policies, these remain
sustained over time, even after the effects of the shock have vanished.
result is due to high current redistribution reducing investments,
that a larger share of future voters will benefit from redistributive
policies. Thus, the welfare state survives beyond the scope for which it
been originally started. This prediction conforms with the evidence that
welfare-state system proved persistent after its first introduction. At
time of the Great Depression, many governments stepped-in with large
programs aimed at reactivating the economy and supporting the impoverished
generation. However, welfare-state programs would not be abandoned after
economic recovery and would, on the contrary, grow in size and scope after
World War II.
Second, there exist equilibria where an existing welfare state is
irreversibly terminated, even when benefit recipients are initially
politically decisive. The breakdown of the welfare state is more likely
pre-tax wage inequality is large, since this strengthens the incentives
private investment and reduces, ceteris paribus, the constituency
the welfare state. Strategic voting motives are key to the existence of
type of equilibria: if agents took future policy as parametric, there
be no welfare state breakdown. This result can cast some light on the
dynamics of the Thatcherite revolution in the 1980's. First, it came about
during a period of growing wage inequality, and second its effects proved
be long-lasting. Even after the Tories went out of office in 1997, the
constituency for traditional welfare-state policies seems to have faded in
the UK. Labour governments by and large continued the economic and social
policies inaugurated by Mrs. Thatcher, with limited public pressure for
While Hassler, Rodriguez-Mora, Storesletten and Zilibotti (2003) focus on
inefficient redistribution, public redistribution may be ex-ante
desirable to societies. Hassler, Krusell, Storesletten and Zilibotti
analyze one such scenario where agents are risk-averse and markets
incomplete. The political mechanism is also different: instead of a
Downsian model, we consider a probabilistic voting mechanism à la
Lindbeck and Weibull (1987), where the winning politician maximizes a
weighted average of the utility of all groups in society. In this
environment, the equilibrium features positive redistribution in the long
run. The reason is that by having a higher marginal utility of income, the
poor exert a stronger influence on the determination of policies (in the
jargoon, there are more "swing voters"
among the poor). The transition towards the steady-state may exhibit
monotonic dynamics or dampening fluctuations in tax rates, depending on
extent of risk aversion. An interesting result is that oscillating tax
are not due to political distortions. On the contrary, a benevolent
policy-maker with commitment power would choose sharper fluctuations,
possibly non-dampening ones, than in the political equilibrium. Political
distortions generate an inefficiently persistent fiscal policy. This
lies in sharp contrast with the predictions of the literature on political
business cycles arguing that political economy exacerbates fluctuations
Alesina, Roubini and Cohen, 1997).
In Hassler, Krusell, Storesletten and Zilibotti (2005b), we extend the
analysis of the dynamics of fiscal policy to a Chamley-Judd model of
taxation, where we show that the absence of commitment can lead to
inefficiencies in both the steady-state levels and the transitional
of taxation. For instance, we show in a
"calibrated" example that the steady-state Ramsey tax (with
commitment) is 22%, while it is 50% rate in the political
equilibrium. Moreover, in the Ramsey economy, taxes are negatively
autocorrelated, while they are highly persistent in the political
equilibrium (with an autoregressive coefficient of 0.4 on a four-year
A large share of government spending is used to finance public goods. In
Hassler, Storesletten and Zilibotti (2006), we investigate the political
economy of public good provision in a model where governments finance
expenditure via income taxation and taxes are allowed to be age-dependent.
Since the tax burden falls more heavily on agents with high labor
the poor want more public good than the rich. The equilibrium is shown to
indeterminate, independent of the initial income and skill distribution
among agents. There exists one "sincere"
equilibrium with high taxes, where the poor are politically decisive, and
range of "strategic" equilibria with
lower taxes, where the rich are politically decisive. In the latter,
restrain taxation to induce a future majority that will keep taxes low,
thereby strengthening the incentive of investors and enlarging the current
tax base for the public good. This multiplicity can explain the existence
large cross-country differences in the size and composition of government
expenditures. For example, in Scandinavian countries, the average size of
government measured by tax revenue is more than half the size of GDP,
it is below one quarter of GDP in the United States and Switzerland. The
theory shows that such differences are not necessarily due to variation in
exogenous factors or preferences. Another interesting finding is that
taxation and public good provision may be inefficiently too low -- in
contrast with the standard emphasis in the politico-economic literature on
factors leading to excess taxation --.
An important aspect of the macro-policy debate is government debt. When
policy is determined through repeated elections, and agents are less than
fully altruistic towards future generations, there is a politico-economic
force pushing towards progressive debt accumulation which arises from the
lack of political representation of the future generations on which the
burden of public debt largely falls. If debt cannot exceed a ceiling
equal to the maximum PDV of future taxation) governments would find it
increasingly hard to finance public good programs. Thus, private affluence
can be accompanied by growing "public
poverty": even though productivity and income grow at a
sustained rate, public funding of education, health and other public
services becomes subject to growing pressure. Indeed, over the last
many countries have been under strain to contain their public spending and
to face a growing public debt (including both explicit and implicit debt
through pension liabilities).
In Song, Storesletten and Zilibotti (2005), we analyze these issues with
aid of a politico-economic model of overlapping generations where the
government finances public good provision through labor taxation and by
issuing debt. First, we show a negative result: when taxation is not
distortionary, public debt grows and converges asymptotically to its
level. Thus, both private and public consumption tend to zero in the long
run. Then, we introduce distortionary effects of taxation on labor supply
Laffer curve). Not surprisingly, an endogenous limit on taxation prevents
private consumption from falling to zero. A less obvious result is that it
can also prevent "public poverty",
namely, it reduces the incentive to accumulate debt. Intuitively,
support for growing public debt is sustained by the belief that future
governments will continue public good provision by increasing taxes.
However, when agents realize that this is not feasible (or increasingly
expensive to achieve), they are induced to support more responsible debt
policies today. In other words, endogenous limits to taxation discipline
This result has implications on the effects of international tax
competition. Such competition serves as a commitment device to avoid
increasing future taxes above the international level. Consequently, tax
competition may actually lead to lower debt and avoid the public poverty
Labor Markets and Child Labor Laws
Dynamic general equilibrium models can also be used to study the
introduction or evolution of specific policies and institutions. Some of
recent work analyzes a variety of labor and product market institutions.
instance, Hassler, Rodriguez-Mora, Storesletten and Zilibotti (2005) and
Marimon and Zilibotti (1999) analyze the political economy of unemployment
insurance to explain the contrasting labor market performance in the US
Western Europe during the last quarter of the XXth Century. Acemoglu,
and Zilibotti (2005) analyze the political economy of industrial policy
the process of development. Doepke and Zilibotti (2005) study the
economy of child labor regulations. I shall now describe in some detail
research discussed in this paper.
While child labor is today regarded as a cruel practice that deprives
children of rights and opportunities, from a historical perspective, this
view of child labor is of a relatively recent origin. In Western
until the nineteenth century most children worked, and there was no stigma
attached to earning income from children's work. A change in attitudes
towards child labor occurred around the mid-XIXth Century, under the
pressure of the union movement. How can this change be explained?
to our theory, the increasing political support for child labor regulation
can be explained by economic motives. In particular, we identify two
behind the increasing support to child labor restrictions. The first is
drive to limit competition: unskilled workers compete with children in the
labor market, and therefore stand to gain from higher wages if child labor
is restricted. Different from other types of competition, the potential
competition comes (at least partly) from inside the unskilled workers'
families. For this reason, workers' attitudes regarding child labor laws
depend not only on the degree to which they compete with children in the
labor market, but also on the extent to which their family income relies
child labor. The second motive is parent's altruism: when the returns to
education are sufficiently high, most parents prefer to have small
and educate their children. Then, the support to child labor restriction
To formalize these ideas, we construct a model where altruistic agents age
and die stochastically, and decide on fertility, education and family
A ban on child labor is introduced when supported by a majority of the
population. First, we derive some analytical results, showing that
politico-economic steady states can exist. In one steady state, child
is legal, unskilled workers have many working children, and there is
support for banning child labor. In the other steady state, child labor is
forbidden, families are small, and the ban is supported by a majority of
voters. In each case, the existing political regime induces fertility
decisions that lock parents into supporting the status quo. The existence
multiple steady states can explain why some developing countries get
in equilibria with a high incidence of child labor and weak political
support for banning child labor, while other countries at similar stages
development have strict regulations and a low incidence of child labor.
Then, we use a calibrated version of the model to replicate the historical
changes which occurred in Britain in the XIXth Century. A prediction of
theory which is in line with the empirical evidence is that the change in
workers' attitudes towards child labor occurs gradually. In the early
of the transition, the working class does not unanimously back
since families with many children continue to depend on child labor.
However, increasing return to schooling eventually induces newly-formed
families to have fewer children and send them to school. Eventually, a
majority of the unskilled workers support the banning of child labor. This
explanation for the introduction of child labor restrictions is consistent
with the observation that child labor regulation were first introduced in
Britain (as well as in other Western countries) in the nineteenth century
after a period of increasing wage inequality. Moreover, the introduction
child labor restrictions was accompanied by a period of substantial
fertility decline and an expansion of education, which is once more
consistent with the theory.
This study contributes to the debate on the introduction of child labor
in developing countries. Even in countries where the majority currently
opposes the introduction of child labor regulations, the constituency in
favor of these laws may increase over time once the restrictions are in
place. Naturally, this requires that other conditions be met. In
the cost of schooling must be sufficiently low, so that poor parents
actually decide to send their children to school, once the restrictions
Acemoglu, Daron, Philippe Aghion and Fabrizio Zilibotti (2006): Distance
Frontier, Selection, and Economic Growth
, Journal of the European
, Volume 4, Issue 1, March.
Alesina, Alberto, Nouriel Roubini, and Gerald Cohen (1997): Political
. Cambridge: MIT Press.
Doepke, Matthias and Fabrizio Zilibotti (2005): The
of Child Labor Regulation
, American Economic Review
, Vol. 95,
Hassler, John, Kjetil Storesletten and Fabrizio Zilibotti (2006):
, Journal of Economic
Hassler, John, Per Krusell, Kjetil Storesletten and Fabrizio Zilibotti
The Dynamics of Government, Journal
, Vol. 52, No. 7, October.
Hassler, John, Per Krusell, Kjetil Storesletten and Fabrizio Zilibotti
On the Optimal Timing of Capital Taxes,
Mimeo, IIES, Oslo and Princeton.
Krusell, Per and José-Víctor Ríos-Rull (1999): On
Government: Political Economy in the Neoclassical Growth
, American Economic Review
, Vol. 89, No. 5,
Hassler, John, José Vicente Rodriguez-Mora, Kjetil Storesletten and
Zilibotti (2005): A
Positive Theory of Geographic Mobility and Social
International Economic Review
, Vo. 46, No. 1, March.
Hassler, John, José Vicente Rodriguez-Mora, Kjetil Storesletten and
Zilibotti (2003): The
Survival of the Welfare State
, American Economic
Vol. 93, No. 1, March.
Lindbeck, Assar and Jürgen W. Weibull (1987): Balanced-budget
redistribution as political equilibrium, Public Choice
Vol. 52, No. 3.
Marimon, Ramon and Fabrizio Zilibotti (1999): Unemployment
vs. Mismatch of Talents: Reconsidering Unemployment
, Vol. 109, No. 455, April.
Song, Zheng, Kjetil Storesletten and Fabrizio Zilibotti (2005): Private
and Public Poverty, Mimeo in progress, IIES, Fudan and Oslo.
EconomicDynamics Interviews Peter Ireland on Money and the
Peter Ireland is Professor of Economics at Boston College. He has
published extensively on monetary economics, in particular on testing
monetary theories and the business cycle impact of monetary policies.
EconomicDynamics: In your 2003 JME, you show that one cannot reject
the stickiness of nominal prices at business cycle frequencies. In
your 2004 JMBC, you argue that money plays a minimal role in the
business cycle. Do these two papers contradict each other?
I do not think there is any substantive contradiction,
as those two papers address somewhat different sets of issues.
In the 2003 JME paper on "Endogenous Money or Sticky Prices," I try
to distinguish between two interpretations of the observed correlations
between nominal variables, like the nominal money stock or the short-term
nominal interest rate, and real variables, like aggregate output.
The first interpretation, present most famously in the work of Friedman
and Schwartz, attributes this correlation to a causal channel, involving
short-run monetary nonneutrality, running from policy-induced changes in
the nominal variables to subsequent changes in real variables. The second
interpretation, first associated with James Tobin's critique of the
Friedman-Schwartz hypothesis but also advanced by others--most notably by
Scott Freeman in some of his best work--attributes these correlations
instead to a channel of "reverse causation," according to which
movements in real output, driven by nonmonetary shocks, give rise to
movements in nominal variables as the monetary authority and the private
banking system also respond systematically to those shocks. My JME paper
finds that an element of monetary nonneutrality, perhaps reflecting the
presence of nominal price rigidity, does seem important in accounting for
the correlations that we find in the data. But the endogenous money or
reserve causation story contains an important element of truth as well--a
full understanding of the postwar US data, in order words, requires that
one take seriously the high likelihood that causality runs in both
The 2004 JMCB paper on "Money's Role in the Monetary Business Cycle," as I
said, addresses a slightly different set of issues. It asks, conditional
on having a model with monetary nonneutrality, whether the effects of
monetary policy are transmitted to real output through movements in the
nominal interest rate or through movements in the money stock. That paper
finds that, at least when it comes to explaining the post-1980 US data,
movements in the nominal interest rate seem to be what really matter for
understanding the dynamic behavior of output and inflation. Importantly,
though, that result by no means implies that policy-induced movements in
the monetary base or in the broad monetary aggregates have no impact on
output or inflation--to the contrary my estimated model does imply that
movements in M matter. The point is more subtle: movements in M do matter,
but they matter because those movements in M give rise first to movements
Your question is a good one, though, since it gets at a much bigger and
more important result that comes out of the recent literature on New
Keynesian economics. The dynamic, stochastic, New Keynesian models of
today are very, very different from older style Keynesian models in that
they admit that output can fluctuate for many reasons, not just in
response to changes in monetary policy or other so-called demand-side
disturbances, but also in response to shocks like the technology shock
from Kydland and Prescott's real business cycle model. Likewise, these New
Keynesian models also admit that to the extent that output fluctuations do
reflect the impact of technology shocks, those aggregate fluctuations
represent the economy's efficient response to changes in productivity,
just as they do in the real business cycle model. This insight runs
throughout all of the recent theoretical work on New Keynesian economics:
by Woodford, by Clarida, Gali and Gertler, by Goodfriend and King, and
many others. Meanwhile, empirical work that seeks to estimate New
Keynesian models, including my own work along those lines, has
consistently suggested that monetary policy shocks have played at most a
modest role in driving business cycle fluctuations in the postwar
US--other shocks including technology shocks consistently show up as being
much more important. Those results echo the findings of others, like Chris
Sims and Eric Leeper, who work with less highly constrained vector
autoregressions and also find that identified monetary policy shocks play
a subsidiary role in accounting for output fluctuations.
And so, the recent literature on New Keynesian economics draws this
important distinction: historically, over the postwar period, Federal
Reserve policy does not seem to have generated hugely important
fluctuations in real output--shocks other than those to monetary policy
have been much more important. But by no means does that finding imply
that larger monetary policy shocks than we've actually experienced in the
postwar US would not have more important real effects. The models imply
that bigger monetary policy shocks would have bigger real effects.
Is the Friedman Rule optimal?
That is another great question--a question that together with the one
that asks why noninterest-bearing fiat money is valued in the first place
represents one of the most important questions in all of monetary theory.
A lot of great minds have grappled with both questions without arriving at
any definitive answers, so far be it from me to suggest that I have any
clear answers myself. But issues concerning the optimality of the
Friedman rule have run through a lot of my published work and those issues
still intrigue me today.
More recently, what has fascinated me is this alternative view of low
inflation and nominal interest rates that contrasts so markedly with the
view provided by Milton Friedman's original essay on the "Optimum Quantity
of Money." Friedman argues that zero nominal interest rates are necessary
for achieving efficient resource allocations in a world in which money is
needed to facilitate at least certain types of transactions, and that
result is echoed in many contemporary monetary models: cash-in-advance
models, money-in-the-utility function models and so on. But then there is
this alternative view that the zero lower bound on the nominal interest
rate implies that in a low-inflation environment, the central bank can
"run out of room" to ease monetary policy in the event that the economy
gets hit by a series of what, again, might loosely speaking be called
adverse demand-side shocks.
In his 1998 Brookings paper, Paul Krugman provocatively associated this
zero-lower-bound problem with the old-style Keynesian liquidity trap and
around the same time that paper was published, Harald Uhlig also had a
paper asking what links might exist between those two ideas. Reconciling
these two views of zero nominal interest rates--the Friedman rule versus
the liquidity trap--remains, I think, one of the most important
outstanding problems in monetary economics. I took my own initial stab at
understanding certain aspects of the problem in my recent IER paper on
"The Liquidity Trap, the Real Balance Effect, and the Friedman Rule,"
recent work by Joydeep Bhattacharya, Joe Haslag, Antoine Martin
and Stevee Russell grapples with similar issues. But this is clearly an
area in which much more work remains to be done.
Before closing, I have to mention that these possible connections between
the Friedman rule and the Keynesian liquidity trap were to my knowledge
first alluded to in a paper by Charles Wilson, "An Infinite Horizon Model
with Money," edited by Jerry Green and Jose Scheinkman. That amazing paper
by Wilson is jam-packed with insights and consequently has provided the
inspiration for countless others. Hal Cole and Narayana Kocherlakota's
great paper from the Minneapolis Fed Review on "Zero Nominal Interest
Rates: Why They're Good and How to Get Them"--that is another great paper
that picks up on some of the results scattered throughout Wilson's; and
then my 2003 article from RED on "Implementing the Friedman Rule" just
builds on Cole-Kocherlakota. It seems that anyone who reads Wilson's
article comes away with ideas for yet another new paper--without a doubt
it is one of the classic contributions to the field of monetary economics.
Bhattacharya, Joydeep, Joseph H. Haslag, and Antoine Martin (2005):
Redistribution, and the Friedman Rule
, International Economic
vol. 46, pages 437-454, May.
Bhattacharya, Joydeep, Joseph H. Haslag, and Steven Russell (forthcoming):
The Role of
Money in Two Alternative Models: When is the Friedman Rule Optimal, and
, Journal of Monetary Economics
Clarida, Richard, Jordi Galí, and Mark Gertler (1999): The
Policy: A New Keynesian Perspective
, Journal of Economic
37, pages 1661-1707, December.
Cole, Harold L. and Narayana Kocherlakota (1998): Zero
Nominal Interest Rates:
They're Good and How to Get Them
, Federal Reserve Bank of
, vol. 22, pages 2-10, Spring.
Freeman, Scott (1986): Inside
Money, Monetary Contractions, and Welfare
Journal of Economics
, vol. 19, pages 87-98, February.
Freeman, Scott and Gregory W. Huffman (1991): Inside
, International Economic Review
, vol. 32, pages
Freeman, Scott and Finn E. Kydland (2000): Monetary
Aggregates and Output
American Economic Review
, vol. 90, pages 1125-1135, December.
Friedman, Milton (1969): The Optimum Quantity of Money
of Money and Other Essays. Chicago: Aldine Publishing Company.
Friedman, Milton and Anna Jacobson Schwartz (1963): Monetary History
United States, 1867-1960.
Princeton: Princeton University Press.
Goodfriend, Marvin and Robert King (1997): The New Neoclassical
Role of Monetary Policy
. In: Ben S. Bernanke and Julio J. Rotemberg,
NBER Macroeconomics Annual
1997. Cambridge: MIT Press.
Ireland, Peter N. (2003a): Implementing
the Friedman Rule
, Review of
, vol. 6, pages 120-134, January.
Ireland, Peter N. (2003b): Endogenous
Money or Sticky Prices?
, vol. 50, pages 1623-1648, November.
Ireland, Peter N. (2004): Money's
Role in the Monetary Business Cycle
Money, Credit, and Banking
, vol. 36, pages 969-983, December.
Ireland, Peter N. (2005): The
Liquidity Trap, the Real Balance Effect, and
, International Economic Review
, vol. 46, pages
Krugman, Paul R. (1998): It's Baaack: Japan's Slump and the Return of the
Trap, Brookings Papers on Economic Activity
, pages 137-187.
Kydland, Finn E. and Edward C. Prescott (1982): Time To
Build and Aggregate
, vol. 50, pages 1345-1370, November.
Leeper, Eric M., Christopher A. Sims, and Tao Zha (1996): What Does
Policy Do?, Brookings Papers on Economic Activity
, pages 1-63.
Tobin, James (1970): Money
and Income: Post Hoc Ergo Propter Hoc?
Journal of Economics
, vol. 84, pages 301-317, May.
Uhlig, Harald (2000): Should
We Be Afraid of Friedman's Rule?
Japanese and International Economies
, vol. 14, pages
Wilson, Charles (1979): An Infinite Horizon Model with Money. In: Jerry R.
and Jose Alexandre Scheinkman, Eds. General Equilibrium, Growth, and
Essays in Honor of Lionel McKenzie
. New York: Academic Press.
Woodford, Michael (2003): Interest and Prices: Foundations of a Theory
. Princeton: Princeton University Press.
Review of Economic
Dynamics: Letter from the Coordinating Editor
On July 1, I took over as co-ordinating editor of the Review of
Dynamics. I'm very excited about my new job. The RED is only
old. But it has already established itself as one of the premier journals
in economics. The journal has published contributions by some of the
leading economists in the world - including Nobel Laureates James Heckman, Finn Kydland, Robert Lucas, and Edward Prescott - and the
of the published papers is incredibly high. Just take a glance at
of the journal, and you'll see what
I'm talking about!
This quality is reflected in a new journal ranking done by two economists
at the Federal Reserve Bank of Boston. It shows that the Review of
Economic Dynamics ranks 13th (!) among all economics journals
impact per article, where impact is measured in terms of impact on
economics journals. (See Table 2 of FRBB 05-12
for details.) This
is a remarkable achievement for so young a journal.
Gary Hansen and Tom
Cooley have indeed done a fantastic job of getting the journal off the
I want to use the rest of this essay to share my ideas about the journal.
One aspect of the journal that I especially like is its broad scope. Some
people perceive the RED as a macroeconomics journal. But this
is wrong. The mission of the Review of Economic Dynamics is to not
to be a
field journal in macroeconomics, but to serve as the flagship journal for
the Society for Economic Dynamics. The scope of the Society is much
broader than macroeconomics. (After all, the next President of the
is David K. Levine, who is
best known for his contributions to economic
theory.) Our board of associate editors at the RED reflects this
scope. It includes such scholars as Wolfgang Pesendorfer (economic
theory), Urban Jermann
(financial economics), and Thomas Holmes
organization). I can't put it any better than the journal's website does:
"We publish contributions in any area of economics provided they
highest standards of scientific research." The scope of the journal
is defined not by any particular
field description, but by the interests of
the members of the Society.
I hesitate to be more precise about what those interests are. The journal
has published papers that are contributions to pure theory. It has
published papers that are contributions to pure measurement. It has
published papers that use econometrics in sophisticated ways to explore
match between theory and data.
Nonetheless, I do believe that there is a kind of work that has a special
home in the Review: the work that is called "quantitative theory." Many in
economics profession remain hostile, or at best ignorant, about
applications of this methodology. The Review regards it as
tool for addressing many of the most important questions in economics.
you've written a quantitative theoretic paper of any kind, the
provides the most constructive and useful reviewing process available.
I have two goals as co-ordinating editor. First, I want to do what all
editors want to do: to improve throughput speed without reducing the
quality of the review process. My aim is to get turn-around times down to
4 months or less on the vast majority of our submissions. From my years
experience as editor/associate editor at various journals, I see no reason
why the review process should take longer than this.
My second goal is more important. For all of us in the Society, the
SED conference has become the most exciting intellectual event of the
I would like to see more of this energy translated into the journal.
There is a simple way for this to happen: the members of the Society all
need to treat the RED as our primary field journal. What does this
practice? All members of the Society should follow the Rule:
If you have a paper that is appropriate for the SED meetings, and
not sending it to a top five journal, send it to the Review of Economic
If we all follow the Rule, I guarantee that the RED will reflect,
than it does now, the intellectual excitement that we see at the SED
conference. I look forward to receiving your submissions and being your
editor in the next five years!
Kocherlakota, Coordinating Editor
Review of Economic
Dynamics: Call for Papers, 2006 Meetings
The 17th annual meetings of the Society for Economic Dynamics will be held
July 6-8 2006 in Vancouver, Canada. The plenary speakers are Peter Klenow
(Stanford), Elhanan Helpman (Harvard), and Hugo Hopenhayn (UCLA). The
program co-chairs are Matthias
Doepke (UCLA) and Esteban
(Princeton). A program committee will select the papers for the
The program will be made up from a selection of invited and submitted
papers. The Society now welcomes submissions from any area in economics.
The deadline for submissions is February 15, 2006. Further details and
instructions on how to submit a paper are available at
Society for Economic Dynamics: Letter from the President
Dear SED Members and Friends:
The 2005 meetings of the SED, held in Budapest, Hungary, were a great
success. Nine or ten parallel sessions ran at a time for three days, with
340 papers presented. For the high quality of the content we should thank
the program organizers Rob
Shimer and Marco
The 2006 meetings will be held in Vancouver, July 6-8, 2006. Details are
and some of the planned
events are already listed there. The program co-chairs are Matthias Doepke
Rossi-Hansberg, and the plenary speakers are Peter Klenow,
Elhanan Helpman, and Hugo Hopenhayn. The submission deadline is February
Now, some good news about personnel changes at the SED:
First, we welcome Narayana
Kocherlakota as the new coordinating editor of
RED. Narayana succeeds Gary
Hansen, whom we thank for the great work he
put into managing RED over the past six years. I urge you to submit your
best work to RED.
Finally, David K. Levine
will take over as SED President in July 2006.
David is an able administrator and a stellar intellect. We are very lucky
that he will lead the SED.
I look forward to seeing you in Vancouver.
Boyan Jovanovic, President
Review: Heer and Maussner's Dynamic General Equilibrium Modelling
Dynamic General Equilibrium Modelling, Computational Methods and
by Burkhard Heer and Alfred
Yet another book on computational methods, but that does not mean the
market is crowded yet. While several other books already focus on
applications of discrete time stochastic dynamic general models with
representative agents, this one distinguishes itself in two respects.
First, it aims at being more practical, for example by giving tips on how
to overcome various traps like initial conditions. Second it expands into
heterogenous agent models, including those with aggregate uncertainty.
All algorithm examples are supported by programs in FORTRAN and/or Gauss
on a companion website.
The representative agent part, after going through some modelling basics,
covers the most popular methods: the linear-quadratic method, parametrized
expectations and projection methods. In the heterogeneous agent part, the
authors introduce the Hansen and Imrohoroglu (1992) borrowing contraint
model and show how to obtain its invariant distribution. From there,
various models and methods are discussed, including transition dynamics.
Aggregate uncertainty in these models is tricky, and recent advances have
made it somewhat tractable to address it. Heer and Maussner discuss the
Krusell and Smith (1998) method and apply it to various models.
The books concludes with a discussion of overlapping generation models and
how to solve them, with and without aggregate uncertainty. One last part
contains various mathematical tools (or refreshers) that complement the
discussion in the previous chapters.
While the authors claim this book to be accessible to advanced
undergraduates, it is really for graduate students (and former ones), who
are the ones most likely to need to customize algorithms to their needs
beyond what is already available on the Internet. This book is most
helpful for this purpose, and it can be used as a textbook for a "methods"
"Dynamic General Equilibrium Modelling" is
published by Springer.
The EconomicDynamics Newsletter is a free supplement
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