This paper is concerned with evaluating the non-market-clearing (NMC) approach of Robert Barro and Herschel Grossman and others from a purely positive point of view. That is, it deals with the broad question of the extent to which the approach provides a theoretically satisfactory explanation of certain stylized facts characterizing the dynamic behavior of aggregate output and the price level. It does not deal with the important and difficult normative questions involving stabilization policy that are often associated with the approach. From this viewpoint the main strength of the NMC approach is its compatibility with the evidence that 1) fluctuations in aggregate output are closely (positively) correlated with fluctuations in aggregate demand, 2) output appears to respond with a much shorter lag than does the price level to changes in aggregate demand, and 3) changes in output are serially correlated from quarter to quarter. The main weakness of the approach is its failure to provide any satisfactory account of how markets are organized. For example, it offers no explanation of how prices are formed, beyond the crude hypothesis that they move in the direction of excess demands, despite the fact that the assumption that prices fail to respond quickly enough to clear markets lies at the heart of the approach. Nor does it explain why agents should be constrained to trade at these prices, even though these constraints are what ultimately produce the multiplier process of the approach. This inattention to the details of market organization also appears to be responsible for the curious multiplier, according to which an increase in aggregate demand, from an initial position of generalized excess demand or even of full employment equilibrium, causes a decrease in output-a prediction that threatens to undermine the compatibility of the approach with the positive correlation between aggregate demand and output unless some reason can be found why excess demand should be less common than excess supply. This shortcoming does not imply that the NMC approach is not useful for many purposes, nor that its predictions are inconsistent with the evidence (except for the predictions of the supply multipliers). But to be consistent with the evidence is not to explain it. What the approach lacks is a satisfactory theoretical underpinning that would at least make it consistent with the same notions of rational self-interest that underlie the rest of economic theory. This leaves us with the question of whether a satisfactory underpinning can be provided to the approach. In other words, can the approach be revised or replaced in such a way that the resulting theory contains a more satisfactory account of market organization, and explains the above mentioned stylized facts in a way that closely resembles the NMC approach. This question cannot now be answered with a great deal of confidence because no one has yet developed a satisfactory theory of market organization. However I think that an affirmative answer is likely, and that the key to developing the answer lies in recognizing that different markets are organized in different ways. In particular some markets, such as those for many labor services, personal credit, and heavy capital goods, are organized on a highly personal basis with individually negotiated contracts, whereas other markets, such as those for widely traded financial assets and for most consumer durables, are organized on a less personal basis by trading specialists like retailers, wholesalers, jobbers, brokers, and stock market specialists. The rest of this paper attempts to shed some light on the question of providing a satisfactory theoretical underpinning for the NMC approach by investigating how a market organized by such specialist *University of Western Ontario. I am indebted to David Laidler for helpful conversations on the topic of this paper, to Robert Solow for his critical comments, and to the Humanities and Social Sciences Research Council of Canada for financial support.

This paper presents a Schumpeterian endogenous growth model in which a steady state exists with a constant growth rate even though population and the inputs to R. & D. are growing. The scale effect of rising population is nullified by product proliferation that fragments the growing demand for intermediate prodcuts, thus preventing the reward to any specific innovation from rising with population. All the ususal comparitive statics results of Schumpeterian growth theory are valid, including the positive effect of R. & D. subsidies on growth.

This paper investigates the feasibility of a monetary policy aimed at pegging the nominal rate of interest. It shows that under general conditions such a policy would produce the well-known cumulative process, despite the fact that there exists a well-behaved rational expectations equilibrium with no tendency for inflation to accelerate or decelerate. The cumulative process shows up as the failure of learning to converge to rational expectations. Specifically, the paper shows, first in a conventional IS-LM model with an expectations-augmented Phillips curve and then in a micro-based finance constraint model, that if people follow any learning rule based on experience that satisfies a weak condition, then the sequence of temporary equilibria under a policy of interest pegging cannot converge. The nonconvergent path that will be observed accords with the familiar cumulative process, in that inflation accelerates if the market rate of interest has been pegged below the natural rate.

This paper investigates the feasibility of a monetary policy aimed at pegging the nominal rate of interest. It shows that under general conditions such a policy would produce the well-known cumulative process, despite the fact that there exists a well-behaved rational expectations equilibrium with no tendency for inflation to accelerate or decelerate. The cumulative process shows up as the failure of learning to converge to rational expectations. Specifically, the paper shows, first in a conventional IS-LM model with an expectations-augmented Phillips curve and then in a micro-based finance constraint model, that if people follow any learning rule based on experience that satisfies a weak condition, then the sequence of temporary equilibria under a policy of interest pegging cannot converge. The nonconvergent path that will be observed accords with the familiar cumulative process, in that inflation accelerates if the market rate of interest has been pegged below the natural rate.

The purpose of this paper is to argue that the pursuit of an activist monetary policy may make economic sense even when people's expectations are formed rationally. The paper presents a simple model in which (1) prices are costly to adjust, (2) there is uncertainty concerning the parameters affecting aggregate demand, and (3) there are positive costs of gathering and processing information. By reference to this model it can be shown that an activist monetary policy may or may not be useful in offsetting aggregate disturbances, depending upon the extent of information costs and of parameter uncertainty.

The purpose of this paper is to argue that the pursuit of an activist monetary policy may make economic sense even when people's expectations are formed rationally. The paper presents a simple model in which (1) prices are costly to adjust, (2) there is uncertainty concerning the parameters affecting aggregate demand, and (3) there are positive costs of gathering and processing information. By reference to this model it can be shown that an activist monetary policy may or may not be useful in offsetting aggregate disturbances, depending upon the extent of information costs and of parameter uncertainty.

One of the most obvious facts of recent monetary history is that high inflation is associated with high nominal interest rates. This association has been interpreted by many as supporting a superneutrality hypothesis: that an increase in inflation will not affect real interest rates in the long run.' However, the bulk of the evidence contradicts superneutrality. Beginning with Irving Fisher (1896, 1930), most empirical investigations have found that fully anticipated inflation has less than a unit effect on nominal interest rates, and thus reduces real interest rates even in the longest of runs. This has been shown under the assumption that expectations are formed rationally (Douglas Pearce, 1979), that they take the form of an arbitrary distributed lag on past inflation rates (Fisher, 1930; William Gibson, 1970), or that they are accurately represented by the Livingstone expectations data (Pearce; Kajal Lahiri, 1976). Lawrence Summers (1983) attempted to measure the long-run effect without an explicit theory of expectations. Regressing long swings in various nominal interest rates against long swings in inflation over various subintervals from 1860 to 1979, he found coefficients consistently less than unity. For the post-World War II era as a whole the coefficients were in the range of 0.5 to 0.75, with standard deviations of 0.08 to 0.33. A few studies have found coefficients close to unity (William Yohe and Denis Karnosky, 1969; Martin Feldstein and Otto Eckstein, 1970; Gibson, 1972; Lucas). But, as several authors have observed (Thomas Sargent, 1976; Robert Shiller, 1980; John Wood, 1981; Summers), these findings are limited to a particular period of U.S. history, approximately 1953-71. Furthermore, even a unitcoefficient would contradict superneutrality of the after-tax real interest rate, which would require a coefficient substantially greater than unity. Even taking into account the other inflation distortions in the tax system, Summers calculated that the coefficient ought to lie in the range of 1.3 to 1.5, far higher than observed. These empirical findings pose a challenge to traditional monetary theory, much of which implies that superneutrality should hold at least approximately. For example, the model of Miguel Sidrauski (1967) implies that the real interest rate should equal the marginal product of capital, which in the long run should equal the representative household's marginal rate of time preference. If this rate of time preference is a constant, then in particular it will be independent of the rate of inflation. If it is positively related to the household's wealth, or utility, then inflation can reduce the marginal product of capital somewhat through what are commonly called Mundell-Tobin effects. That is, higher inflation can reduce the demand for real balances, which reduces real wealth, which lowers the rate of time preference and leads to further capital accumulation.2 But this real balance effect on saving is commonly recognized to be too small to make *Department of Economics, Social Science Centre, University of Western Ontario, London, Canada N6A 5C2. We are grateful to Charles Adams, Norman Cameron, John Chilton, Jacob Frenkel, David Laidler, Ben McCallum, Baldev Raj, Brad Reid, Jack Weldon, John Whalley, Ron Winrck, and two anonymous referees for helpful discussions and comments on earlier drafts. All errors are attributable to transaction costs. 'Robert Lucas (1980) finds empirical support for the hypothesis, which he calls one of the central implications of the quantity theory of money. It has also been adopted by a wide range of more eclectic economists, as evidenced by its endorsement in two of the most popular macroeconomics textbooks (Rudiger Dornbusch and Stanley Fischer, 1981, pp. 454-58; Robert J. Gordon, 1978, pp. 289-91). 2These implications of variable time-preference can be drawn almost immediately from the work of Hirofumi Uzawa (1968). A graphical analysis is presented by David Laidler (1969b), who focuses on the logically equivalent question of the effects of paying interest on money.