Research Database

This article is a summary of the papers presented at the Models of Monetary Economies II conference, hosted in May 2004 by the Federal Reserve Bank of Minneapolis and the University of Minnesota. It focuses on several themes in the papers, including the microfoundations of monetary theory, optimal monetary policy, and the role of banking, and also overviews how the contributions fit together. Finally, the article comments on monetary theory in general—how it has evolved and where it may be headed.

This essay briefly reviews the professional life and work of economist S. Rao Aiyagari, who died after a heart attack on May 20, 1997, at the age of 45. Aiyagari is described as “one of the ablest economists of his generation.” The essay is accompanied by a complete list of Aiyagari’s published work and reprints of three of his articles in the Federal Reserve Bank of Minneapolis Quarterly Review: “Deflating the Case for Zero Inflation” (Summer 1990), “On the Contribution of Technology Shocks to Business Cycles” (Winter 1994), and “Macroeconomics With Frictions” (Summer 1994).

This paper develops a two-sector neoclassical model of international trade with endogenous capital accumulation and intertemporal optimization. In contrast to the traditional “2x2x2” model, there is a Ricardian implication that countries specialize according to comparative advantage. Consequently, the theory predicts that government expenditure policies are unlikely to affect the established pattern of specialization and trade, but that changes in tax policies can result in a dramatic reorganization of world production. Further, the dynamic “2x2x2” model can explain many of the salient features of international trade that are problematic for the standard Heckscher-Ohlin-Samuelson model.