The stationary sunspot equilibria of a simple overlapping generations economy with heterogeneousagents are considered. These equilibria are known to be suboptimal. The focusof the paper is on the efficacy, based on welfare economic considerations and informational requirements, of government policy in such anenvironment. The main result is thatknowledge of the sunspot equilibrium net trades, weak interval-type information on two parameters, and weak set-type information on the location of some optimal stationary allocationis sufficient to induce a competitive equilibrium that is a Pareto optimal Pareto improvement over the sunspot allocation, which has the further property of reaching a Pareto optimal stationary allocation in finite time.The results are interpreted as demonstrating that, in a simple model with a sunspot environment, policy is very effective and welfare economic considerations lead to stabilization.

We study the impact of a minimum consumption requirement on the rate ofeconomic growth and the evolution of wealth distribution. The requirementintroduces a positive dependence between the intertemporal elasticity ofsubstitution and household wealth. This dependence implies a transitionphase during which the growth rate of per-capita quantities rise towardtheir steady-state values and the distributions of wealth, consumption, andpermanent income become more unequal. We calibrate the minimum consumptionrequirement to match estimates available for a sample of Indian villagersand find that these transitional effects are quantitatively significant anddepend importantly on the economy's steady-state growth rate.

The behavior of postwar real U.S. GNP, the inputs to anaggregate production function, and several formulations of the associated Solowresiduals for the presence of nonlinearities in their generating mechanisms are examined. Three different statistical tests for nonlinearity are implemented: the McLeod-Li test, the BDS test, and the Hinich bicovariance test.We find substantial evidence for nonlinearity in the generating mechanism of real GNP growth but no evidence for nonlinearity in the Solow residuals.We further find that the generating mechanism of the labor input series is nonlinear, whereas that of the capital services input appears to be linear.We therefore conclude that the observed nonlinearity in real output arisesfrom nonlinearities in the labor markets, not from nonlinearities in the technical shocks driving the system. Finally, we investigate the source of the nonlinearities in the labor markets by examining simulated data from a model of the Dutch economy with asymmetric adjustment costs.

We present a method for using rational expectations in alinear-quadratic optimization framework. Following the approach put forward by Sims, we solve the model through a QZ decomposition, which is generally easier to implement than the more widely used Blanchard-Kahn method.

This paper analyzes productive government expenditure in a stochasticAK growth model. First, a centrally planned economy is characterized,emphasizing the trade-off between the effects of both deterministicand stochastic government expenditures on the equilibrium growth rateand its variance. Both the growth-maximizing and thewelfare-maximizing shares of government expenditure are derived andshown to depend (differentially) upon the degree of risk in theeconomy. Whereas production risk reduces the welfare-maximizingshare of government expenditure, it may either increase or decreasethe growth-maximizing share, depending upon the degree of riskaversion. Next, the stochastic equilibrium in a decentralized economyis derived. The first-best optimal tax structure is characterized andits dependence on risk is determined. The formal analysis issupplemented by some numerical simulations to assess the quantitativesignificance of risk and the divergence that this generates between thewelfare-maximizing and growth-maximizing size of government.

Elhanan Helpmanis on a quest for knowledge. He is a researcher in transition, constantly redefininghis fields of interest by altering the questions asked and the techniques used. Likemany of the great economists, Elhanan has worked in many areas: open economy macro,trade under uncertainty, the new international economics, growth theory, andpolitical economy, to list the most famous. However, this interview is not intended as areview of his contributions. Rather, it is about what drives Elhanan's creativeprocess: his wide-ranging reading, his characteristic stubbornness in tacklingproblems, the conceptualization of his larger research agenda, and his recollectionsof how he initiated transitions between fields. It is a very personal interview forthose in search of creative inspiration.

Linear dynamical systems are widely used in many differentfields from engineering to economics. One simple but important class of suchsystems is called the single-input transfer function model. Suppose that allvariables of the system are sampled for a period using a fixed samplerate. The central issue of this paper is the determination of the smallestsampling rate that will yield a sample that will allow the investigator toidentify the discrete-time representation of the system. A critical samplingrate exists that will identify the model. This rate, called the Nyquistrate, is twice the highest frequency component of the system. Sampling at alower rate will result in an identification problem that is serious. Thestandard assumptions made about the model and the unobserved innovationerrors in the model protect the investigators from the identificationproblem and resulting biases of undersampling. The critical assumption that is needed to identify an undersampled system is that at least one of theexogenous time series be white noise.