Inflation and the monetary financing of deficits are analyzed in a model in which the deficit is constrained to be less than a given fraction of a measure of aggregate market activity. Depending on parameter values, the model can have multiple steady states. Under adaptive learning with heterogeneous learning rules, there is convergence to a subset of these steady states. In some cases, a high-inflation constrained steady state will emerge. However, with a sufficiently tight fiscal constraint, the low-inflation steady state is globally stable. We provide experimental evidence in support of our theoretical results.

This paper provides a historical chronology of economic activity in 16th- and 17th-century France that is based on wheat price series in Paris and Toulouse. A stochastic regime-switching model enables us to benchmark eras and summarize the salient features of a development difficult to appraise in all its complexity. A new class of Markov regime-switching time-series models is introduced to allow for nontrivial interdependencies between different types of cycles that make the economy grow at an unsteady rate. With a predominantly agricultural cycle, we uncover a strongly periodic Markov switching scheme for recorded wheat prices from the grain markets of Paris and Toulouse. Besides the periodic nature of the Markov chain, we also study whether a common factor determined the state of the economy in Paris and Toulouse or whether each series moved independently.

Macroeconomic performance in the Economic and Monetary union (EMU) will be impaired if national fiscal policy flexibility and monetary flexibility of the ECB is limited, goods markets adjust sluggishly, labor mobility is low, and automatic stabilization from federal taxes and government spending is low. This paper analyzes the stabilization of output fluctuations induced by symmetric and asymmetric macroeconomic shocks in the EMU. It is shown how national fiscal flexibility and flexibility of the monetary policy of the ECB can stabilize fluctuations of the average EU business cycle that are generated by symmetric shocks. Furthermore, it is demonstrated how, under EMU, national fiscal flexibility and a system of fiscal transfers are able to stabilize differences in national business cycles that are generated by asymmetric shocks.

It is argued that standard impulse response analysis based on vector autoregressive models has a number of shortcomings. Although the impulse responses are estimated quantities, measures for sampling variability such as confidence intervals sometimes are not provided. If confidence intervals are given, they often are based on bootstrap methods with dubious theoretical properties. These problems are illustrated using two German monetary systems. Proposals are made for improving current practice. Special emphasis is placed on systems with cointegrated variables.

“His views have had as much, if not more, impact on the way we think about monetary policy and many other important economic issues as those of any person in the last half of the twentieth century.” These words in praise of Milton Friedman are from economist and Federal Reserve Chair Alan Greenspan. They are spoken from a vantage point of experience and knowledge of what really matters for policy decisions in the real world. And they are no exaggeration. Many would say they do not go far enough.

It is a rare monetary policy conference today in which Milton Friedman's ideas do not come up. It is a rare paper in macroeconomics in which some economic, mathematical, or statistical idea cannot be traced to Milton Friedman's early work. It is a rare student of macroeconomics who has not been impressed by reading Milton Friedman's crystal-clear expositions. It is a rare democrat from a formerly communist country who was not inspired by Milton Friedman's defense of a market economy written in the heydays of central planning. And it is a rare day that some popular newspaper or magazine around the world does not mention Milton Friedman as the originator of a seminal idea or point of view.

Any one of his many contributions to macroeconomics (or rather to monetary theory, for he detests the term macroeconomics) would be an extraordinary achievement. Taken together they are daunting:

[bull ] permanent income theory;

[bull ] natural rate theory;

[bull ] the case for floating exchange rates;

[bull ] money growth rules;

[bull ] the optimal quantity of money;

[bull ] the monetary history of the United States, especially the Fed in the Great Depression, not to mention contributions to mathematical statistics on rank-order tests, sequential sampling, and risk aversion, and a host of novel government reform proposals from the negative income tax, to school vouchers, to the flat-rate tax, to the legalization of drugs.

Milton Friedman is an economist's economist who laid out a specific methodology of positive economic research. Economic experts know that many current ideas and policies—from monetary policy rules to the earned-income tax credit—can be traced to his original proposals. He won the Nobel Prize in economics in 1976 for “his achievements in the field of consumption analysis, monetary history and theory and for his demonstration of the complexity of stabilization policy.” Preferring to stay away from formal policy-making jobs, he has been asked for his advice by presidents, prime ministers, and top economic officials for many years. It is in the nature of Milton Friedman's unequivocally stated views that many disagree with at least some of them, and he has engaged in heated debates since graduate school days at the University of Chicago. He is an awesome debater. He is also gracious and friendly.

Born in 1912, he grew up in Rahway, New Jersey, where he attended local public schools. He graduated from Rutgers University in the midst of the Great Depression in 1932. He then went to study economics at the University of Chicago, where he met fellow graduate student Rose Director whom he later married. For nearly 10 years after he left Chicago, he worked at government agencies and research institutes (with one year visiting at the University of Wisconsin and one year at the University of Minnesota) before taking a faculty position at the University of Chicago in 1946. He remained at Chicago until he retired in 1977 at the age of 65, and he then moved to the Hoover Institution at Stanford University.

I have always found Milton and Rose to be gregarious, energetic people, who genuinely enjoy interacting with others, and who enjoy life in all its dimensions, from walks near the Pacific Ocean to surfs on the World Wide Web. The day of this interview was no exception. It took place on May 2, 2000, in Milton's office in their San Francisco apartment. The interview lasted for two-and-a-half hours. A tape recorder and some economic charts were on the desk between us. Behind Milton was a floor-to-ceiling picture window with beautiful panoramic views of the San Francisco hills and skyline. Behind me were his bookcases stuffed with his books, papers, and mementos.

The interview began in a rather unplanned way. When we walked into his office Milton started talking enthusiastically about the charts that were on his desk. The charts—which he had recently prepared from data he had downloaded from the Internet—raised questions about some remarks that I had given at a conference several weeks before—which he had read about on the Internet.

As we began talking about the charts, I asked if I could turn on the tape recorder, since one of the topics for the interview was to be about how he formulated his ideas—and a conversation about the ideas he was formulating right then and there seemed like an excellent way to begin the interview. So I turned on the tape recorder, and the interview began. Soon we segued into the series of questions that I had planned in advance (but had not shown Milton in advance). We took one break for a very pleasant lunch and (unrecorded) conversation with his wife Rose before going back to “work.” After the interview, the tapes were transcribed and the transcript was edited by me and Milton. The questions and answers were rearranged slightly to fit into the following broad topic areas:

[bull ] money growth, thermostats, and Alan Greenspan;

[bull ] causes of the great inflation and its end;

[bull ] early interest in economics;

[bull ] graduate school and early “on-the-job” training;

[bull ] permanent income theory;

[bull ] return of monetary economics;

[bull ] fiscal and monetary policy rules;

[bull ] use of models in monetary economics;

[bull ] use of time-series methods;

[bull ] real business-cycle models, calibration, and detrending;

[bull ] natural rate hypothesis;

[bull ] role of debates in monetary economics;

[bull ] capitalism and freedom today;

[bull ] monetary unions and flexible exchange rates.

We study comparative statics results for the steady-state monetary equilibria of a simple random matching model of money with endogenous prices and no extrinsic uncertainty. Some of the results appear counterintuitive (both when take-it-or-leave-it offer or when Nash–Rubinstein bargaining is used in the model). Consistency of the equilibrium expectations causes the partial equilibrium intuitions to be reversed. We then proceed to apply the new insights to the analysis of sunspot equilibria in these type of models of bilateral trade with money.