______________________________________________________________________________ Americans now work 50 percent more than do the Germans, French, and Italians. This was not the case in the early 1970s when the Western Europeans worked more than Americans. In this paper, I examine the role of taxes in accounting for the differences in labor supply across time and across countries, in particular, the effective marginal tax rate on labor income. The population of countries considered is that of the G-7 countries, which are major advanced industrial countries. The surprising finding is that this marginal tax rate accounts for the predominance of the differences at points in time and the large change in relative labor supply over time with the exception of the Italian labor supply in the early 1970s.

We survey the literature on search-theoretic models of the labor market. We show how this approach addresses many issues, including the following: Why do workers sometimes choose to remain unemployed? What determines the lengths of employment and unemployment spells? How can there simultaneously exist unemployed workers and unfilled vacancies? What determines aggregate unemployment and vacancies? How can homogeneous workers earn different wages? What are the tradeoffs firms face from different wages? How do wages and turnover interact? What determines efficient turnover? We discuss various modeling choices concerning wage determination and the meeting process, including recent models of directed search.

This paper reconsiders the Phelps-Lucas hypothesis, according to which temporary real effects of purely nominal disturbances result from imperfect information about the nature of these disturbances. This explanation for the real effects of monetary policy is often dismissed on the ground that the Lucas (1972) model predicts only highly transitory effects on real activity, and none at all insofar as changes in monetary policy can be observed by the public prior to any measurable effect on aggregate nominal expenditure. The present paper

Can neoclassical theory account for the Great Depression in the United States--- both the downturn in output between 1929 and 1933 and the recovery between 1934 and 1939? Yes and no. Given the large real and monetary shocks to the U.S. economy during 1929--33, neoclassical theory does predict a long, deep downturn. However, theory predicts a much different recovery from this downturn than actually occurred. Given the period's sharp increases in total factor productivity and the money supply and the elimination of deflation and bank failures, theory predicts an extremely rapid recovery that returns output to trend around 1936. In sharp contrast, real output remained between 25 and 30 percent below trend through the late 1930s. We conclude that a new shock is needed to account for the Depression's weak recovery. A likely culprit is New Deal policies toward monopoly and the distribution of income. The views expressed herein are those of the authors and not necessarily those of...

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This paper documents the opaqueness of central banks about the economic models they use to choose policy but argues that this is largely due to the lack of consensus about the correct model of the economy within the economic profession. The latter is illustrated by contrasting three currently popular models of the transmission mechanism. Although the inflation targets of Western central banks are currently quite clear they tend to be hazy about their output targets and about whether they are strict or flexible inflation targeters (in Svensson’s (1997) sense), and in the second case, how flexible. They are also remarkably silent about the shape of their loss function, particularly so with respect to losses from alternative values of the output gap in spite of the fact, that in an uncertain world, policy decisions are affected by the shape of the loss function in the entire range of output gaps.

According to economic theory, supported by empirical and laboratory evidence, the equilibrium price of a financial security reflects all of the information regarding the security's value. We investigate the dynamics of the computational process on the path toward equilibrium, where information distributed among traders is revealed stepby -step over time and incorporated into the market price. We develop a simplified model of an information market, along with trading strategies, in order to formalize the computational properties of the process. We show that securities whose payoffs cannot be expressed as a weighted threshold function of distributed input bits are not guaranteed to converge to the proper equilibrium predicted by economic theory. On the other hand, securities whose payoffs are threshold functions are guaranteed to converge, for all prior probability distributions. Moreover, these threshold securities converge in at most n rounds, where n is the number of bits of distributed information. We also prove a lower bound, showing a type of threshold security that requires at least n/2 rounds to converge in the worst case.

A first-order linear difference system under rational expectations is, AEy t+1 jI t = By t +C(F)Ex t jI t ; where y t is a vector of endogenous variables; x t is a vector of exogenous variables; Ey t+1 jI t is the expectation of y t+1 given date t information; and C(F)Ex t jI t = C 0 x t + C 1 Ex t+1 jI t + ::: + C n Ex t+n jI t . Many economic models can be written in this form, especially if the matrix A is permitted to be singular. If the model is solvable, y t can be divided into two sets of variables: dynamic variables d t that evolve according Ed t+1 jI t = Wd t + d (F)Ex t jI t and other variables which that obey the dynamic identities f t = Kd t f (F)Ex t jI t . This paper provides an algorithm that constructs the reduced system Ed t+1 jI t = Wd t + d (F)Ex t jI t for any solvable linear difference system. We also provide algorithms for computing (i) perfect foresight solutions and (ii) Markov decision rules that can be used when there is a unique solution.

This paper presents a model of business cycles driven by shocks to consumer expectations regarding aggregate productivity. Agents are hit by heterogeneous productivity shocks, they observe their own productivity and a noisy public signal regarding aggregate productivity. The public signal gives rise to “noise shocks, ” which have the features of aggregate demand shocks: they increase output, employment and in‡ation in the short run and have no e¤ects in the long run. The dynamics of the economy following an aggregate productivity shock are also a¤ected by the presence of imperfect information: after a positive productivity shock output adjusts gradually to its higher long-run level, and there is a temporary negative e¤ect on in‡ation and employment. Numerical results suggest that the model can generate sizeable amounts of noise-driven volatility in the short run. JEL Codes: E32, D58, D83 Keywords: information. Consumer con…dence, aggregate demand shocks, business cycles, imperfect MIT and NBER. Email: glorenzo@mit.edu. A previous version of this paper circulated under the title: