[This paper revisits the analysis of risk taking and income distribution pioneered by Friedman, but in an extended--general equilibrium--framework. The results of this paper cast doubt on the generality of many of Friedman's strong propositions. In particular, we find that the relationship between inequality and liking for risk is not necessarily monotonic. Nor is it the case that greater diversity in tastes for risk necessarily contributes to greater inequality. The paper also analyzes the effect of progressive taxation on national income and inequality in the context of risk taking.]

This paper discusses a simulation procedure where innovations from time-series processes are used in conducting simulation experiments with macroeconometric models. A particular theoretical example using the term structure of interest rates is studied here, along with actual simulation experiments using a large macroeconometric model. This analysis illustrates the advantages of simulating with innovations and the extent to which more standard simulation procedures lead to misleading results. The innovation-simulation technique can be used to provide information on the response of the economy to shocks, even when the macroeconometric model is not invariant to policy changes. Policymakers might find such information to be quite valuable.

This paper contains an empirical investigation of the rate of return to storing wine. The view commonly expressed in the wine literature that this return is very large is found to be inconsistent with the recent history of wine prices. In fact, the data suggest that the expected return to storing wine is no larger than the return to riskless assets.

[At a minimum, this paper should serve as a warning against too easy an acceptance of the view that the costs of sustained inflation are small relative to the costs of unemployment. If a temporary reduction in unemployment causes a permanent increase in inflation, the present value of the resulting future welfare costs may well exceed the temporary short-run gain. Previous analyses have underestimated the cost of a permanent increase in the inflation rate because they have ignored the growth of the economy and therefore the growth of the future instantaneous welfare costs. In the important case in which the growth of aggregate income exceeds the social discount rate, no reduction in unemployment can justify any permanent increase in the rate of inflation. Quite the contrary, if the inflation rate is above its optimal level, the economy should then be deflated to reduce the inflation rate regardless of the temporary consequences for unemployment.]

This paper contains an empirical investigation of the rate of return to storing wine. The view commonly expressed in the wine literature that this return is very large is found to be inconsistent with the recent history of wine prices. In fact, the data suggest that the expected return to storing wine is no larger than the return to riskless assets.

This paper revisits the analysis of risk taking and income distribution pioneered by Friedman, but in an extended--general equilibrium--framework. The results of this paper cast doubt on the generality of many of Friedman's strong propositions. In particular, we find that the relationship between inequality and liking for risk is not necessarily monotonic. Nor is it the case that greater diversity in tastes for risk necessarily contributes to greater inequality. The paper also analyzes the effect of progressive taxation on national income and inequality in the context of risk taking.

[This paper discusses a simulation procedure where innovations from time-series processes are used in conducting simulation experiments with macroeconometric models. A particular theoretical example using the term structure of interest rates is studied here, along with actual simulation experiments using a large macroeconometric model. This analysis illustrates the advantages of simulating with innovations and the extent to which more standard simulation procedures lead to misleading results. The innovation-simulation technique can be used to provide information on the response of the economy to shocks, even when the macroeconometric model is not invariant to policy changes. Policymakers might find such information to be quite valuable.]

At a minimum, this paper should serve as a warning against too easy an acceptance of the view that the costs of sustained inflation are small relative to the costs of unemployment. If a temporary reduction in unemployment causes a permanent increase in inflation, the present value of the resulting future welfare costs may well exceed the temporary short-run gain. Previous analyses have underestimated the cost of a permanent increase in the inflation rate because they have ignored the growth of the economy and therefore the growth of the future instantaneous welfare costs. In the important case in which the growth of aggregate income exceeds the social discount rate, no reduction in unemployment can justify any permanent increase in the rate of inflation. Quite the contrary, if the inflation rate is above its optimal level, the economy should then be deflated to reduce the inflation rate regardless of the temporary consequences for unemployment.