Seventeenth Annual Conference on Macroeconomics. (Conferences).

The NBER's Seventeenth Annual Conference on Macroeconomics, organized by Mark Gertler, NBER and New York University, and Kenneth S. Rogoff, NBER and Princeton University, was held in Cambridge on April 5 and 6. The following papers were discussed:

Nancy L. Stokey, University of Chicago, "'Rules versus Discretion' after Twenty-Five Years"

Discussants: Peter Ireland, Boston College, and Lars E. O. Svensson, NBER and Princeton University

Aart Kraay, The World Bank, and Jaume Ventura, NBER and MIT, Foreign Assets as a Buffer Stock"

Discussants: Fabrizio Perri, New York University; and Eric Van Wincoop, University of Virginia

J. Bradford DeLong, NBER and University of California, Berkeley, "Productivity Growth in the 2000s"

Discussants: Susanto Basu, NBER and University of Michigan, and Boyan Jovanovic, NBER and University of Chicago

James H. Stock, NBER and Harvard University, and Mark W. Watson, NBER and Princeton University; "Has the Business Cycle Changed and Why?"

Discussants: Jordi Gali, NBER and Universitat Pompeu Fabra, and Robert E. Hall, NBER and Stanford University

Charles Engel, NBER and University of Wisconsin, "Expenditure Switching and Exchange Rate Policy"

Discussants: Karen Lewis, NBER and University of Pennsylvania, and Pierre-Olivier Gourinchas, NBER and Princeton University

Alberto Alesina and Robert J. Barro, NBER and Harvard University, and Silvana Tenreyro, Harvard University, "Optimal Currency Areas"

Discussants: Rudiger Dornbusch, NBER and MIT, and Andrew K. Rose, NBER and University of California, Berkeley.

Stokey notes that although discretionary policy has some advantages, maintaining a reputation can be costly. Hence, in choosing among instruments for conducting monetary policy, the ease of observability is an important factor. The advantage of a policy rule depends on the type of discretionary government it replaces. A rule is more attractive in an economy where the discretionary government is sometimes myopic than in one where it is always the Ramsey type.

Faced with income fluctuations, countries smooth their consumption by raising savings when income is high (and vice versa). How much of these savings do countries invest at home and abroad? In other words, what are the effects of fluctuations in savings on domestic investment and the current account? In the long run, Kraay and Ventura find, countries invest the marginal unit of savings in domestic and foreign assets in the same proportions as in their initial portfolio, so that the latter is remarkably stable. In the short run, countries invest the marginal unit of savings mostly in foreign assets, and only gradually do they rebalance their portfolio back to its original composition. This means that countries try to smooth not only consumption but also domestic investment. To achieve this, they use foreign assets as a buffer stock.

The causes of the productivity growth slowdown of the 1970s remain mysterious. By contrast, nearly all agree that the cause of the productivity growth speed-up of the 1990s lies in the information technology sector. The extraordinary pace of invention and innovation in the information technology sector has generated real price declines of between 10 and 20 percent per year for decades. Increased total factor productivity in the information technology capital goods-producing sector, coupled with extraordinary real capital deepening as the quantity of real investment in information technology capital bought by a dollar of nominal savings grows, together have driven the productivity growth acceleration of the later 1990s. Will this new higher level of productivity growth persist? According to DeLong, the answer is likely to be "yes." The most standard of simple applicable growth models -- that of Oliner and Sichel -- predicts that the social return to information technology investment would have to suddenly and discontinuously drop to zero in order for the upward jump in productivity growth to reverse itself in the near future. More complicated models that focus in more detail on the determinants of investment spending, or on the sources of increased total factor productivity, appear to strengthen, not weaken, forecasts of productivity growth over the next decade.

From 1960-83, the standard deviation of annual growth rates of real GDP in the United States was 2.71 percent. From 1984-2001, the corresponding standard deviation was 1.59 percent. Stock and Watson investigate this large drop in the cyclical volatility of the real economy. Their evidence suggests that the drop in volatility has been widespread: it is evident in most measures of sectoral output and employment, and in measures of wage and price inflation. Split-sample estimates of breaks in volatility suggest a break in the early 1980s, but considerable sampling uncertainty around the break date. Stock and Watson investigate several explanations for the reduced volatility, including changes in sectoral composition, inventory management methods, monetary policy, and smaller structural shocks.

Changes in nominal exchange rates can lead to "expenditure switching" when they influence relative international prices. A traditional argument that favors a policy of flexible nominal exchange rates rests on the notion that when prices are sticky in producers' currencies, movements in nominal exchange rates can change relative prices between home and foreign goods. But if prices are fixed ex ante in consumers' currencies, then nominal exchange rate flexibility cannot achieve any relative price adjustment. In fact in that case, nominal exchange rate fluctuations have the undesirable feature of leading to deviations from the law of one price. Thus the case for floating exchange rates is weakened if prices are sticky in this way. The empirical literature appears to support the notion that prices are sticky in consumers' currencies. Engel also provides support for this conclusion. He then reviews some new approaches in the theoretical literature that imply an important expenditure-switching role even when consum er prices are sticky in consumers' currencies. Still, further empirical research is needed to resolve the quantitive importance of the expenditure-switching role of nominal exchange rates.

As the number of independent countries increases and their economies become more integrated, we would expect to observe more multi-country currency unions. Alesina, Barro, and Tenreyro explore the pros and cons for different countries to adopt as an anchor the dollar, the euro, or the yen. Although there appear to be reasonably well-defined euro and dollar areas, there does not seem to be a yen area. The authors also address the question of how trade and co-movements of outputs and prices would change after a currency union is formed. This response is important because the decision of a country to join a union would depend on how the union affects trade and co-movements.

These papers will be published by the MIT Press as NBER Macroeconomics Annual, Volume 17. They will also be available at "Books in Progress" on the NBER website, www.nber.org.