Volume 4, Issue 1, November 2002
The Research Agenda:Robert Shimer on Labor Market Frictions
and Business Cycles
I would like to use this opportunity to discuss some of my recent research
on the business cycle implications of labor market frictions. For reasons
that I will discuss more below, I will frame my discussion in terms of the
Mortensen-Pissarides matching model (Pissarides 1985, Mortensen and
Pissarides 1994, and Pissarides 2000). This model has been used
extensively for policy analysis, for example to examine the role that
unemployment insurance and mandatory firing costs play in generating
highunemployment rates in Europe (Pissarides 1999). With some exceptions
(notably Merz 1995 and Andolfatto 1996), however, there has been little
exploration of the model's ability to match a standard set of business
cycle facts. In a recent working paper (Shimer 2002a), I argue that the
Mortensen-Pissarides model is quantitatively incapable of generating
significant employment fluctuations in response to empirically plausible
productivity shocks. That is, the model has almost no amplification
mechanism. Despite this, the structure of the model allows us to think
about other types of shocks that look to be a much more promising
explanation for business cycle fluctuations.
Robert Shimer is Associate Professor of Economics at Princeton University.
His field of research is search and matching applied to labor markets.
The Mortensen-Pissarides Matching Model
I begin by describing the simplest version of the Mortensen-Pissarides
matching model. There are two types of agents, workers and firms, both
risk-neutral and infinitely-lived with a common discount rate. Workers may
be either employed or unemployed. Employed workers earn an endogenous wage
w but may not search for another job. Unemployed workers get a
payment b and may find a job. Firms have access to a production
with constant returns to scale in labor. That is, each employed worker
yields a fixed revenue p and must be paid the wage w. To
hire new workers,
firms must create a vacancy at a per-period cost of c. In other
firm's per-period profits are n(p-w) - c v, where n is the
employees and v is the number of vacancies. Free entry drives the
discounted profits from creating a vacancy to zero.
Rather than modelling the search process explicitly, the
Mortensen-Pissarides model reduces it to a black-box "matching function".
Let U denote the fraction of workers who are unemployed and
V denote the
number of vacancies in the economy. Then the number of matches is a
function M(U,V), increasing in both arguments. The standard
that this function has constant returns to scale, which implies that each
unemployed worker finds a job with probability M(U,V)/U and each
is filled with probability M(U,V)/V, both functions only of the
vacancy-unemployment ratio V/U. The vacancy-unemployment ratio, and
the rate at which unemployed workers find jobs, is in turn determined
endogenously by firms' collective vacancy decisions.
In the simplest version of the Mortensen-Pissarides matching model, the
job destruction decision, i.e. the probability with which employed workers
become unemployed, is treated as exogenous: all matches end with
probability d per period. Mortensen and Pissarides (1994) extend this
simple model to endogenize the job destruction decision.
A central feature of this model is that the matched worker and firm are in
a bilateral monopoly situation. That is, an employed worker could always
leave her job and find another employer; however, because search is
time-consuming, workers are impatient, and all jobs are identical, she
prefers to work for her current employer. Likewise, a firm could fire an
employee and attempt to hire another one, but this will take time and will
not yield a better match. There are many wages consistent with the pair
agreeing to match, and so the model provides little guidance as to how
wages are determined. Pissarides (1985) assumes wages satisfy an axiomatic
Nash bargaining solution. A worker's threat point is unemployment and a
firm's threat point is a vacancy. The two agents split the gains from
production in excess of this threat point.
From the perspective of a matched worker and firm, wage bargaining is a
zero sum game with distributional but not allocational consequences, and
so the Nash bargaining assumption might seem innocuous. But from an
aggregate perspective, wage bargaining matters. Firms' expectations of
future wages is crucial to their job creation decisions, which balance the
up-front cost of creating a vacancy against the expected profits from
employing workers. If firms anticipate having to pay high wages in the
future, they will be reluctant to create vacancies today, reducing job
creation and raising the unemployment rate.
Although the central role that wage bargaining plays in the determination
of employment and unemployment rates in the Mortensen-Pissarides model is
sometimes seen as a shortcoming, I will argue below that the bilateral
monopoly situation is the reason why we can use the model to think about a
different type of shock that looks to be a promising explanation for at
least some part of business cycle fluctuations. In a reduced form model,
these shocks amount essentially to changes in workers' bargaining power.
In Shimer (2002a), I examine a stochastic version of this simple model,
with shocks driven by a first-order autoregressive process for
productivity, p, and the job destruction rate, d. At any
point in time,
the state of the economy is described by the current level of
productivity, the current job destruction rate, and the current
unemployment rate. In principle, the curse of dimensionality should make
this problem very difficult to handle computationally. But I show that the
equilibrium vacancy-unemployment ratio and wage can be expressed as
functions only of the first two state variables, productivity and the job
destruction rate. Moreover, both functions are easy to compute numerically
-- and in some special cases, analytically. After computing the
vacancy-unemployment ratio at each productivity level and job destruction
rate, I simulate a large number of paths and recover the stochastic
properties of unemployment, vacancies, and wages in response to these
I choose model parameters to match as many macro/labor facts as possible.
Due to its simplicity, the model cannot replicate some standard business
cycle facts (Cooley and Prescott 1995). For example, there is no
investment or capital in this model; and the risk-neutrality assumption
implies the intertemporal elasticity of substitution is infinite. But
there are a number of other facts that the model potentially can match.
One that is particularly important is the cyclical behavior of vacancies
and unemployment. The correlation between the detrended time series for
the two variables is strongly negative, -0.88 (Abraham and Katz 1986,
Blanchard and Diamond 1989), and they have approximately the same standard
deviation of the percent deviation from trend. That is, if unemployment is
17 percent below trend (5 percentage points instead of 6 percentage
points), vacancies are approximately 17 percent above trend. This means
that the vacancy-unemployment ratio, and hence the ease of finding a job,
is strongly procyclical. On the other hand, wages and productivity are
much less variable and much less correlated with either vacancies or
I next consider the behavior of the model economy in response to a
productivity shock. Qualitatively, this raises the profit from a filled
job p - w, encouraging firms to create vacancies. A higher
vacancy-unemployment ratio decreases the rate at which vacancies are
filled, restoring the zero profit condition. It also makes it easier for
workers to find jobs, lowering the unemployment rate. Under reasonable
parameter restrictions, vacancies and unemployment move in opposite
directions, along a downward sloping "Beveridge curve," consistent with
the previously mentioned fact. But quantitatively, almost all of a
productivity shock accrues to workers in the form of higher wages, leaving
only a muted response of vacancies and unemployment. Equivalently, it
takes an unrealistically large productivity shock to generate reasonable
movements in vacancies and unemployment. The model offers little
amplification of the underlying shocks.
I also consider the economy's response to a job destruction shock. This
has a direct effect on the unemployment rate because the
employment-to-unemployment transition rate increases. It also has an
indirect effect: a decline in the expected future duration of jobs
discourages vacancy creation. This raises average unemployment duration
and further increases the unemployment rate. Moreover, the increase in
unemployment duration tends to reduce wages slightly, mitigating the
decline in profits. In net, I find a large response of the unemployment
rate to a job destruction shock but little movement in the
vacancy-unemployment ratio or wages. As a result, vacancies and
unemployment are counterfactually positively correlated in response to
such shocks, while wages are realistically rigid.
If one only wanted to explain a subset of the data, the model behaves
quite well. For example, Blanchard and Diamond (1989), Mortensen and
Pissarides (1994) and Cole and Rogerson (1999) find that the model can
match the behavior of unemployment and vacancies (as well as some other
variables), but do not examine the behavior of wages. Essentially, these
papers introduce unrealistically large productivity shocks in order to
generate fluctuations. On the other hand, Ramey and Watson (1997) and
Pries (2002) assume that job finding rates are constant and exogenous or
equivalently that the vacancy-unemployment ratio is acyclical. Both models
generate large unemployment changes associated with only moderate wage
fluctuations. Similarly, in the Lucas and Prescott (1974) search model,
workers seek production opportunities available in an
exogenously-determined supply. Models in this framework (e.g. Gomes,
Greenwood, and Rebelo 2001) therefore cannot explain why the
vacancy-unemployment ratio is procyclical, although they are again capable
of matching the cyclical behavior of wages. It is only by looking
simultaneously at the behavior of unemployment, vacancies, wages, and
productivity that the difficulty of matching the business cycle facts
emerges. The lesson to take away from this is that it is important to
explore models quantitatively along as many dimensions as possible.
Alternative Wage Setting Assumptions
Wage flexibility, particularly wage flexibility in new jobs, is central to
these results. Suppose there was a productivity increase, but firms did
not expect wages in new jobs to change. This would amplify the effect on
firm entry, since firms would enjoy all of the productivity increase in
the form of higher profits. Conversely, if firms anticipated declining
wages without an associated change in productivity, this would also lead
to an increase in entry and a decline in the unemployment rate. Moreover,
quantitatively both of these effects are likely to be big. For example,
firms' economic profits are at least an order of magnitude smaller than
their wage bill, so a one percent decline in wages leads to at least a ten
percent increase in profits and an associated spurt in job creation. (On
the other hand, rigidity of wages in old jobs, perhaps due to implicit or
explicit wage contracts, has no effect on job creation.)
An assertion that that rigid real wages amplify productivity shocks and
that wage shocks are an important source of business cycle fluctuations is
unsatisfactory. From a theoretical perspective, one would like to know why
real wages are rigid in response to productivity shocks and yet sometimes
change in the absence of such shocks. From a normative perspective, it is
impossible to analyze a change in labor market policies in the absence of
a policy-invariant model of wages. The important next step is therefore to
develop alternative models of wage determination from first principles,
which do not have a strong link between wage and productivity movements.
One feature of the labor market that may be important in this regard is
asymmetric information. A firm knows more about its productivity than does
an employee, while a worker knows more about her outside opportunities
than does her employer. For a worker to signal that she has a good outside
opportunity is costly. She must leave the firm. Likewise, for a firm to
credibly signal that it has low productivity is costly. It must typically
lay off some workers or sharply reduce the hours of existing employees.
The wage also plays an important role, conveying information to the worker
about the firm's productivity -- it is at least willing to pay her wage --
and to the firm about the worker's outside opportunities -- she is at
least willing to work at that wage.
In Shimer (2002b), I develop a simple model with one-sided asymmetric
information. A worker does not know how productive her job is. She is able
to make take-it-or-leave-it wage demands, but is reluctant to ask for too
high a wage because, if the firm refuses her demand, she is laid off.
There are two important determinants of wages in this model. First,
workers examine the hazard rate of the productivity distribution. If the
hazard rate is large, asking for a higher wage is risky, i.e. it results
in a substantial increase in the layoff probability. Second, workers
consider how long it will take to get another job offer. If job offers are
scarce, workers will be reluctant to risk demanding a high wage. This also
feeds back into firm behavior. If firms anticipate that workers will
demand high wages, they will create few jobs, making job offers scarcer
and suppressing wage demands. In parametric examples, I find that an
increase in mean productivity raises wages and reduces unemployment, much
as in a model with symmetric information. An increase in the variance of
productivity lowers wages and has an ambiguous effect on unemployment, an
effect that is absent from models with symmetric information. If
recessions are periods of low mean productivity and high variance, as
Storesletten, Telmer, and Yaron (2001) suggest, we would observe little
variation in wages and significant declines in employment.
The wage setting regime, i.e. workers making take-it-or-leave-it wage
demands, is important for these results. Since there is no reason to
believe that this is an accurate characterization of wage setting in
reality, relaxing this assumption is desirable. Of course, any other
wage-setting assumption faces the same criticism. An alternative
possibility is to focus on Pareto optimal incentive-compatible mechanisms
in an economy with two-sided asymmetric information. Here the tools
developed in the endogenous incomplete markets literature (e.g. Spear and
Srivastava 1987, Thomas and Worrall 1990, Atkeson and Lucas, 1992) are
likely to prove useful. It is an open question whether such a model
predicts significant employment fluctuations in response to modest
Abraham, Katharine, and Lawrence Katz (1986): "Cyclical
Sectoral Shifts or Aggregate Disturbances?
," Journal of Political
Economy, 94, 507-522.
Andolfatto, David (1996): "Business
Cycles and Labor-Market Search
American Economic Review, 86, 112-132.
Atkeson, Andrew and Robert Lucas (1992): "On Efficient Distribution
with Private Information," Review of Economic Studies, 59, 427-453.
Blanchard, Olivier, and Peter Diamond (1989): "The Beveridge Curve,"
Brookings Papers on Economic Activity, 1, 1-60.
Cole, Harold, and Richard Rogerson (1999): "Can the
Mortensen-Pissarides Matching Model Match the Business-Cycle Facts?
International Economic Review, 40, 933-959.
Cooley, Thomas, and Edward Prescott (1995): "Economic Growth and
Business Cycles," in Frontiers of Business Cycle Research, ed. by
Thomas Cooley. Princeton University Press, New Jersey.
Gomes, Joao, Jeremy Greenwood, and Sergio Rebelo (2001): "Equilibrium
Unemployment," Journal of Monetary Economics, 48, 109?152.
Lucas, Robert and Edward Prescott (1974): "Equilibrium Search and
Unemployment," Journal of Economic Theory, 7, 188-209.
Merz, Monika (1995): "Search in the Labor Market and the Real
Business Cycle," Journal of Monetary Economics, 36, 269?300.
Mortensen, Dale, and Christopher Pissarides (1994): "Job Creation and
Job Destruction in the Theory of Unemployment," Review of Economic
Studies, 61, 397-415.
Pissarides, Christopher (1985): "Short-Run
of Unemployment, Vacancies, and Real Wages
," American Economic Review,
Pissarides, Christopher (1999): "Policy influences on unemployment:
The European experience," Scottish Journal of Political Economy, 46,
Pissarides, Christopher (2000): "Equilibrium Unemployment Theory".
MIT Press, Cambridge, MA, second edition.
Pries, Michael (2002): "Persistence of Employment Fluctuations: A
Model of Recurring Job Loss," forthcoming Review of Economic Studies.
Ramey, Gary, and Joel Watson (1997): "Contractual
Job Destruction, and Business Cycles
," Quarterly Journal of Economics,
Shimer, Robert (2002a): "The
Cyclical Behavior of Equilibrium
Unemployment, Vacancies, and Wages: Evidence and Theory
Shimer, Robert (2002b): "Wage Setting with Asymmetric Information,"
Spear, Stephen and Sanjay Srivastava (1987): "On Repeated Moral
Hazard with Discounting," Review of Economic Studies, 54, 599-617.
Storesletten, Kjetil, Chris Telmer, and Amir Yaron (2001) "Asset
Pricing with Idiosyncratic Risk and Overlapping Generations
Thomas, Jonathan and Tim Worrall (1990): "Income Fluctuation and
Asymmetric Information: An Example of a Repeated Principal-Agent
Problem," Journal of Economic Theory, 51, 367-390.
EconomicDynamics Interviews Boyan Jovanovic on Technology Adoption
Boyan Jovanovic is Professor of Economics at New York University and
Visiting Professor of Economics at the University of Chicago. His works
evolves, among other topics, around industrial organization, especially
technology adoption. Jovanovic's RePEc/IDEAS entry
EconomicDynamics: In a recent Review of Economic Dynamics article with
Peter Rousseau, you made the bold prediction that consumption should grow
at the yearly rate of 7.6% in the 21th century. This is based on a model
of learning by doing where growth is essentially fueled by computer
technology. Your estimate is based on the assumption that experience can
be measured by cumulative sales in hardware and software. How sensitive is
your estimate to alternative measures, in particular the introduction of
depreciation or obsolescence?
The model has obsolescence of capital in it. New
capital devalues the old, and that is why the term g(p) enters the user
cost formula in equation (7). But depreciation is indeed zero -- it
implies the stock of capital is the same as the cumulative number of
machines produced and simplifies the algebra. But I do not think that it
has much to do with the particular estimate that you report.
The high estimate of 7.6% derives from the fact that a high fraction of
equipment is getting cheaper very fast. Much revolves around how big a
fraction of the stock of equipment is involved, and whether the price
index is accurately measured. We highlight this number partly because the
parameter values that imply it also give the model a good fit to the
1970-2001 experience of the U.S.. But I simply invite the reader to read
the paper on this. Instead, let me now say a couple of things that are not
in the paper about reasons why the share of equipment and the price index
are both hard to predict.
The share of equipment is in efficiency units. Even if knew the growth
rate of efficiency units of IT capital, we cannot infer its share in
equipment if we do not know the initial share of IT equipment. We need an
initial condition. We may overestimate the importance of IT capital if
we assume too large an initial condition.
Second, the price decline of computers may be exaggerated, at least in
cases when quality cannot be directly measured. Bart Hobijn argues that
markups probably decline over the life of a product or the life of a
product line, and that new products are introduced with a high markup.
we cannot anchor the quality of a new product accurately relative to the
quality of old products, this may then appear as declining prices per unit
of quality when, in fact, there may in the long run be no price decline at
all. In other words, BLS data may overstate quality change for this
Overall, I do believe that IT will form the basis for more and more
products and processes and, since those who know tell us that Moore's
Law will continue at its historical pace for at least 20 more years, it
seems clear that the world’s output per head will grow a lot faster
the 21st century than it did in the 20th.
In work with Jan Eeckhout, you show that knowledge spillovers in
production at the firm level do not necessarily lead to technology
convergence. Rather, the fact that followers may want to free ride on
leaders creates endogenous and permanent inequality across firms. You
apply this concept to city growth as well. Would this also apply to
countries and how does your work relate to North-South models of
Yes. I do believe it. But the cross-country TFP numbers seem to say
otherwise. Eeckhout's and my model implies that TFP is higher for
followers than for the leaders as followers accumulate less measured
capital than the leaders, but they derive more spillovers from the leaders
and therefore appear like they are using their capital more efficiently.
Evidence on U.S. firms and plants supports this, in that large firms and
plants have lower TFP than small ones. But cross-country evidence does not
-- Hall and Jones report that TFP is positively related to development of
countries. Since large firms are found mainly in rich countries, this
evidence seems to say the opposite. If we are to believe the cross country
evidence, it says that if we look at the world market for steel, say, the
large producers have higher TFP whereas if we only were to look at the
U.S. producers, large producers would have lower TFP. I have to believe
the U.S. evidence because it comes from a variety of sources and is based
on better data than the cross-country evidence. But offhand I do not see
what the source of the discrepancy is. At any rate, a referee was adamant
that the model does not apply to the issue of development, and we more or
less concede this in footnote 4 of the version that will come out in the
AER in December.
ED: With Peter Rousseau, you also work on merger cycles and show that
they are essentially linked to major technology innovations. One
consequence is that merger activity is also correlated with stock prices.
As more and more people think that stock prices have been overvalued
recently, would you say too many mergers have occurred? Does history
exhibit such merger overshooting with proportionally more ex-post
inefficient mergers toward the end of waves?
If the buyer is overvalued and the target is not, and if the buyer
is using a share swap to buy the target, then the overvaluation argument
goes through. If the stock market as a whole is overvalued, and the target
is a private company that presumably is not overvalued, then the argument
again goes through. But most of the capital that has been acquired in this
way has been in public companies. In other words, targets themselves are
quoted in the stock market, at least once we weigh the targets by their
value. Moreover, many targets have been recent IPOs, and on the NASDAQ
which is held to have been the place where firms were overvalued the most.
So, if the targets are the ones that were overvalued, then I think that
the overvaluation story says not that there have been too many mergers,
but too few.
Hall, Robert E., and Charles I Jones, 1999. "Why Do
Some Countries Produce So Much More Output Per Worker Than Others?
Quarterly Journal of Economics, 114, 83-116.
Hobijn, Bart, 2001. "Is equipment price
deflation a statistical artifact?
," Federal Reserve Bank of New York
Staff Report 139.
Jovanovic, Boyan, and Jan Eeckhout, 2002. "Knowledge Spillovers
and Inequality", American Economic Review, forthcoming.
Jovanovic, Boyan, and Peter Rousseau,
2002. "Mergers as
," NBER working paper 9279.
Jovanovic, Boyan, and Peter Rousseau,
Law and Learning by Doing
," Review of Economic Dynamics, 5, 346-375.
Bruce Smith: Our
Colleague and Friend, by Bruce Champ and Stephen
RePEc/IDEAS entries: Bruce
Smith, Bruce Champ,
Bruce Smith's death on July 9, 2002, at the age of 47, was a great
personal loss for us, and a great loss for the economics profession. Our
lives and careers would have been very different had it not been for
Bruce, and his contributions to monetary economics, macroeconomics, and
economic history were enormous.
Bruce was astonishingly prolific. Over the course of a 21-year career, he
published 95 papers. Of these, 35 appeared in print during the last five
years of his life, at a time when Bruce had to deal with the debilitating
effects of treatment for cancer. Bruce refused to let a ravaging disease
slow him down, and had much work in the pipeline at the time of his death,
including 11 current working papers. How did he do it? In the early 1990s,
when Bruce was in the process of moving from the University of Western
Ontario to Cornell, the three of us coauthored a paper, and we learned
first-hand what lay behind this phenomenal flow of output. Bruce first
quickly helped frame the idea of the paper, we sorted out what we thought
we wanted to say, and then work began, with everyone working furiously to
keep up with Bruce. When the results were in place, Bruce volunteered to
write the first draft. Thinking we had several weeks to wait, we took a
breather, but three days later Bruce sent us a complete first draft,
printed by hand on yellow legal paper. This was a full-length paper of
lucid prose, complete with copious footnotes and complete references. At
the time this seemed super-human, but if we had known Bruce better we
would not have been surprised.
The Minnesota flavor of Bruce's work is distinctive. Bruce distinguished
himself as an undergraduate at the University of Minnesota by taking
courses in the graduate program, where he came in contact with Tom Sargent
and Neil Wallace, who were clearly formative influences. After graduating
with a B.S. in Economics from Minnesota in 1977, Bruce left for M.I.T.,
graduating with a Ph.D. in Economics in 1981 under the supervision of Stan
Fischer. The flavor of M.I.T. is certainly harder to find in Bruce's work
than is the flavor of Minnesota, but M.I.T is likely where he first became
exposed to information economics, which played a key role in much of his
Bruce had a self-deprecating sense of humor, and would describe his early
research as "exercises in grafting static information models onto
overlapping generations models of monetary economies." However, his work
amounted to far more than that. Bruce was a pioneer in studying the role
of private information in modern models of money and banking. He examined
credit rationing and its implications for monetary and fiscal policy, the
effect of deposit interest rate ceilings on the stability of the banking
system, and how private information changes our view of the Real Bills
Doctrine and the Quantity Theory of Money. Bruce knew a great deal about
monetary history, and made key contributions to our knowledge of colonial
monetary regimes in North America, pre-Civil War U.S. banking, and banking
panics during the National Banking era. One of Bruce's unusual abilities
was in forging innovative links between monetary history and modern
economic theory, as when he argued (we think, persuasively) that Peel's
Bank Act could be seen as an attempt to kill sunspot equilibria by way of
a legal restriction on private financial intermediaries.
Bruce, in his work with Valerie Bencivenga, was one of the first
researchers to show how financial intermediation could matter for economic
growth. He went on to do further research with Valerie Bencivenga, John
Boyd, and Stacey Schreft, among others, which extensively explored the
role of financial factors, intermediation, and policy in the growth
process. This work paid careful attention to the older literature on
growth and development, modern growth theory, intermediation theory, and
empirical facts. Another important element in Bruce's research was the
study of the implications of multiple equilibria in monetary economics, as
in some of his sole-authored papers and those written with Costas
Azariadis and Jim Bullard, among others. A key idea that permeates Bruce's
papers on this topic is the tension between indeterminacy and efficiency.
Bruce argued that it was typical that financial restrictions, while
reducing efficiency in some desirable equilibria, could also eliminate
less desirable equilibria. Thus, while a financial restriction might make
good outcomes less good, it might eliminate the possibility of some bad
outcomes as well.
Bruce wrote many papers, and he wrote with many coauthors as well. In
fact, Bruce had more coauthors than most researchers have published
papers. Bruce clearly enjoyed the interaction and exchange of ideas
involved in collaborative work, and that enthusiasm extended to his
students, some of whom were also his coauthors. Bruce was extremely
generous with his time, and had an extensive network of graduate students
and former students to whom he was intensely loyal. That generosity
extended to the effort he put into placing his students. He also spent
much of his time, particularly in the summers, at Federal Reserve Banks,
particularly the Atlanta Fed, the Cleveland Fed, the Kansas City Fed, the
Minneapolis Fed, and the St. Louis Fed. Bruce contributed much to the
research efforts of all of these institutions, and was adept at
communicating the important role of research to the management of the
Federal Reserve System.
As a colleague, Bruce was fun to be around. His knowledge of the
literature was extensive, his mind was incredibly quick, he always had
words of encouragement, and he had a wonderful sense of humor. It is no
secret that Bruce was highly principled, and found it difficult to
compromise on positions that he had thought through carefully and was
convinced were right. Thus, in an academic environment, Bruce could be
difficult to live with at times, but this perhaps had more to do with
imperfections in the world rather than any imperfection in Bruce's
In "It's A Wonderful Life," Jimmy Stewart learns what life would have been
like had he not existed. Had Bruce Smith not existed, we are sure that
life would have been far less interesting and lively, and that our own
work would have suffered for it. Bruce taught us that it is a
wonderful life, and his determination and drive in the face of great
adversity is an inspiration. Bruce has left a very large pair of shoes
that no one can
fill, but what he taught us and left behind in his writings will help to
fill the void.
Society for Economic
Dynamics: Letter from the President
Dear SED Members and Friends:
It is once again time for my annual invitation to continue your support of
the Society for Economic Dynamics by paying the annual membership dues,
submitting your research to the Review of Economic Dynamics, and
participating in our annual conference. Once again the Society has
continued to grow in numbers and importance. Submissions to RED have
also increased this past year. Our membership is at an all-time high and
participation in our annual conference set new records.
Our annual conference was held in New York City this past June. It was our
most successful conference to date both in terms of the quality of the
program and the quality of the local arrangements. The local arrangements,
supervised by Alessandra Fogli, Vincenzo Quadrini, and Felicia Shutter
were spectacular. Narayana Kocherlakota and Fabrizio Perri put together a
conference program that was truly impressive.
The 2003 conference will be held on June 25-27th in Paris, France. The
meetings are being organized by Hubert Kempf and Jean-Olivier Hairault. You
can look forward to an interesting conference and a magnificent time in
Paris. Lee Ohanian of UCLA
and Franck Portier of the
de Toulouse are organizing the program. The plenary speakers will be
Malaith, Jean Tirole, and Jeremy
Greenwood. The call for papers can be
found at http://www.minneapolisfed.org/research/events/sed/.
Plan on participating - you
won't want to miss it
This year again the SED sponsored a small research conference jointly with
the C.V. Starr Center at New York University. The topic of the conference
was "Finance and the Macroeconomy." It was organized jointly by Sydney
Ludvigson, Ellen McGrattan and John Heaton. We heard nine papers over one
and a half days and these will appear in the spring of 2003 as a special
issue of the Review of Economic Dynamics.
Please join again in support of the Society for Economic Dynamics.
Information about how to pay your 2003 dues and your subscription to RED
are available here.
I look forward to seeing you in June in Paris.
Thomas F. Cooley,
Society for Economic Dynamics
Society for Economic
Dynamics: Call for Papers, 2003 Meetings
The 2003 meetings of the Society for Economic Dynamics will be held June
26-June 28, 2003 on the campus of Universite' Paris 1 in Paris, France.
The plenary speakers are Jeremy Greenwood, George Mailath, and Jean
Tirole. The program co-chairs are Lee Ohanian and Franck Portier.
The Society for Economic Dynamics solicits applications in all areas of
dynamic economics to be presented at the conference. Members and
non-members of the society are invited to participate. The deadline for
submissions is February 1, 2003. Please use our standardized form
available at http://www.minneapolisfed.org/research/events/sed/
submit an abstract, and include the name, affiliation, address, and e-mail
address of the author interested in presenting the paper. This form is
required for all applicants. Submission of the paper is optional and
should be done by submitting a URL via the standardized form or by mailing
a hard copy to SED Conference, ATTN: Lee Ohanian, Department of Economics,
UCLA, 405 Hilgard Avenue, Los Angeles, CA 90024. Fax transmissions will
not be considered.
Review of Economic
Dynamics: Letter from the Coordinating Editor
The Review of Economic Dynamics, the official journal of the Society for
Economic Dynamics, will begin its sixth year of publication in January.
Already there is a long list of papers that will be forthcoming in Volume
6, and it looks like this is shaping up to be the highest quality volume
yet. Of course, I fully expect that Volume 7 will be even better. I hope
your research will be a part of it!
In this letter, I want to let you know about some recent changes to the
Editorial Board, as well as some changes in our preferred method of
submitting papers for possible publication in RED.
Editorial Board Changes
I am pleased to announce that Ellen McGrattan, of the Federal Reserve Bank
of Minneapolis, has joined the group of Editors, which also includes
Michele Boldrin, Boyan Jovanovich, Timothy Kehoe, Robert E. Lucas, Jr.,
Richard Rogerson, and me.
In addition, Robert Shimer from Princeton
University has agreed to serve as an Associate Editor.
Tom Cooley, who was the
founding Coordinating Editor of RED and is
currently President of the Society, has stepped down as an editor, but
will serve on the journal's Editorial Advisory Board. Tom deserves most
of the credit for establishing the journal and positioning it on the road
to success. I know that the journal will continue to benefit from his
advice and experience in the years to come.
From the beginning, the journal has encouraged electronic submissions. In
fact, most of our review process, from soliciting referee reports to
notifying authors about editorial decisions, has been handled by email.
Still, most of our submissions come to the Editorial Office the old
fashioned way. Although I have planned to make electronic submission the
preferred method of submission for some time, the technology for creating
truly portable PDF files was not well understood by many RED authors.
When I began as Coordinating Editor in the summer of 2000, a very high
percentage of the PDF files we received needed to be recreated so that all
fonts were embedded.
By now the percentage of faulty PDF files submitted to RED has decreased
significantly, so we are ready to make this our preferred method of
submission. Hence, you are encouraged to send your submission by email to
firstname.lastname@example.org as a PDF file.
Unfortunately, we cannot accept DVI
files, Word files, or any other electronic format. Melissa Turner, our
editorial assistant, will acknowledge your submission and is available to
answer questions about the status of your submission during the review
process. Although this is our preferred submission method, you can still
mail us printed copies of your paper if you prefer the traditional method.
If you are unsure of how to create a truly portable PDF file, some
instructions are available on the RED website.
RED Coordinating Editor
Review: McKenzie's Classical General Equilibrium Theory
Classical General Equilibrium Theory
by Lionel W. McKenzie
Just published by MIT Press, this book covers the main theorems of general
equilibrium theory that are usually taught through notes or articles. Thus
it offers a serious basis for any student of GE. The core focuses on
"Classical" GE, i.e. the theory launched by Arrow, Debreu, Samuelson and
the author, with some of the important extensions: demand theory,
tâtonnement, Leontief production, comparative statics, the core,
and uniqueness of the competitive equilibrium. While much of this theory
is also applicable to dynamic settings (just define the set of goods
appropriately), a chapter also covers some specificities of time: the von
Neumann and Ramsey models as well as turnpikes.
Obviously, this is a rather technical subject matter. This book is
therefore not accessible to everyone. Indeed, the point of the book is to
state and prove rigorously the theorems with a unified language and
unified notation. A lot of material is covered, from the fundamentals of
demand theory to some frontiers of research, like the use of
supermodularity for comparative statics. As a consequence, the writing is
dense but still does not compromise on completeness and clarity.
Some teachers like to use Debreu's Theory of Value complemented with some
articles. They may want to consider adopting this book that covers all
"Classical General Equilibrium Theory" has been published by MIT Press
in August 2002.
The EconomicDynamics Newsletter is a free supplement
the Review of Economic
(RED). It is distributed through the
mailing list and archived at http://www.EconomicDynamics.org/newsletter/. The
editors are Christian
Zimmermann (RED associate editor)
Hansen (RED coordinating editor).
The EconomicDynamics Newsletter is published twice a
in April and November.
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