Research Highlights

  • Dave Cass and I invented the sunspot equilibrium (SSE) concept. “Sunspots” is short-hand for purely extrinsic uncertainty — uncertainty that does not affect the fundamentals but may affect the outcomes. There are two interpretations: (1) SSE are the limit of the equilibria as the volatility of extrinsic uncertainty become small. In this context, SSE provide a rational-expectations explanation of “excess market volatility” — the excess of the randomness in outcomes over the randomness in the fundamentals. This interpretation is what motivates the use of the word “sunspots”. Real-world (i.e., Jevons) sunspots do affect the fundamentals, but not very much. (2) Economies — like games — are social institutions in which agents must base their beliefs and actions on the beliefs and actions of others. Just as in game theory, there can be stochastic solutions (SSE), even in economies with non-stochastic fundamentals.

  • In a 1971 JPE paper, I introduced the formal general-equilibrium analysis of Paul Samuelson’s overlapping-generations (OG) model. I showed that the restrictions on market participation caused by births and deaths are not the cause of the “Samuelson’s friction.” The open horizon is the source of non-optimality. Yves Balasko and I provided the equilibrium and welfare analyses of monetary (and non-monetary) general OG economies. Yves and I were the first to analyze bonafide fiscal policies — policies that allow money to have positive value. Contrary to Ricardo, retirement of the public debt is not necessary for bonafidelity in OG economies: there can be rational bubbles. These bubbles might even be stochastic. Indeed, the SSE literature began with rational bubble money with price-level volatility. See my Malinvaud lecture (1977)

  • I introduced in 1966 and 1967 a macroeconomic theory of inventive activity in which “technological knowledge” is a non-conventional factor of production. There are increasing returns to scale in all factors (including the non-conventional factor) taken together. Hence purely competitive provision of inventive activity is not possible. Because of increasing returns, the growth process is history-dependent and permits both explosive growth and contractionary growth. In (1973), I put forward the first growth model in which inventive activity depends on the prevailing industrial organization.