Many have argued that if labor income is difference stationary, the permanent income hypothesis predicts that consumption should be relatively volatile. In U.S. aggregate data, labor income is well characterized as having a unit root; however, consumption turns out to be relatively smooth. This anomaly is known as Deaton's paradox. I resolve Deaton's paradox by providing decompositions of labor income into permanent and transitory components. These preserve the univariate dynamic properties of labor income. However, when agents distinguish permanent and transitory movements in their labor income--as the rational expectations hypothesis asserts they should--the permanent income hypothesis correctly predicts the observed smoothness in consumption.

We interpret fluctuations in GNP and unemployment as due to two types of disturbances: disturbances that have a permanent effect on output and disturbances that do not. We interpret the first as supply disturbances, the second as demand disturbances. Demand disturbances have a hump-shaped mirror-image effect on output and unemployment. The effect of supply disturbances on output increases steadily over time, peaking after two years and reaching a plateau after five years.

Much macroeconometric discussion has recently emphasized the economic significance of the size of the permanent component in GNP.Consequently, a large literature has developed that tries to estimate this magnitude-measured, essentially, as the spectral density of increments in GNP at frequency zero.This paper shows that unless the permanent component is a random walk this attention has been misplaced: in general, that quantity does not identify the magnitude of the permanent component.Further, by developing bounds on reasonable measures of this magnitude, the paper shows that a random walk specification is biased towards establishing the permanent component as important.

This Paper develops a model of economic growth and activity locating endogenously on a 3-dimensional featureless global geography. The same economic forces influence simultaneously growth, convergence, and spatial agglomeration and clustering. Economic activity is not concentrated on discrete isolated points but instead a dynamically-fluctuating, smooth spatial distribution. Spatial inequality is a Cass-Koopmans saddlepath, and the global distribution of economic activity converges towards egalitarian growth. Equality is stable but spatial inequality is needed to attain it.

Many have argued that if labor income is difference stationary, the permanent income hypothesis predicts that consumption should be relatively volatile. In U.S. aggregate data, labor income is well characterized as having a unit root; however, consumption turns out to be relatively smooth. This anomaly is known as Deaton's paradox. I resolve Deaton's paradox by providing decompositions of labor income into permanent and transitory components. These preserve the univariate dynamic properties of labor income. However, when agents distinguish permanent and transitory movements in their labor income--as the rational expectations hypothesis asserts they should--the permanent income hypothesis correctly predicts the observed smoothness in consumption.