SEVERAL ECONOMISTS2 have argued that if individuals correctly perceive the rate of inflation so that their expectations are rational, then deterministic models of money and economic growth are unstable. In this view, points on the steady state equilibrium paths examined by Tobin [9] and others are saddlepoints, there being a tendency to diverge more and more from such a path as time elapses if the system is not initially on the path. The source of instability is understood most easily in the context of a model in which money is neutral, with real growth and capital accumulation both being exogenous with respect to the money supply and price level and, moreover, with both equaling zero. Time is continuous. The price level P and money supply M are assumed at each moment to satisfy the demand function for real balances

A general equilibrium search model makes layoff costs affect the aggregate unemployment rate in ways that depend on equilibrium proportions of frictional and structural unemployment that in turn depend on the generosity of government unemployment benefits and skill losses among newly displaced workers. The model explains how, before the 1970s, lower flows into unemployment gave Europe lower unemployment rates than the United States and also how, after 1980, higher durations have kept unemployment rates in Europe persistently higher than in the United States. These outcomes arise from the way Europe's higher firing costs and more generous unemployment compensation make its unemployment rate respond to bigger skill losses among newly displaced workers. Those bigger skill losses also explain why U.S. workers have experienced more earnings volatility since 1980 and why, especially among older workers, hazard rates of gaining employment in Europe now fall sharply with increases in the duration of unemployment.

This paper reconsiders the aliasing problem of identifying the parameters of a continuous time stochastic process from discrete time data. It analyzes the extent to which restricting attention to processes with rational spectral density matrices reduces the number of observationally equivalent models. It focuses on rational specifications of spectral density matrices since rational parameterizations are commonly employed in the analysis of the time series data.

We study optimal monetary and fiscal policies in a New Keynesian model with heterogeneous agents, incomplete markets, and nominal rigidities. Our approach uses small‐noise expansions and Fréchet derivatives to approximate equilibria quickly and efficiently. Responses of optimal policies to aggregate shocks differ qualitatively from what they would be in a corresponding representative agent economy and are an order of magnitude larger. A motive to provide insurance that arises from heterogeneity and incomplete markets outweighs price stabilization motives.