Research Database

This paper argues that the reporting of facts in light of theory fosters the development of theory. Dynamic neoclassical macro theory guided the selection of facts to report. The hope is that these facts will foster the further development of this theory. A finding is that the price level is countercyclical in the post-Korean War period. This finding debunks the myths that the price level is procyclical, with the postwar period being no exception.

A version of the permanent income model is developed in which the bliss point of the agent is stochastic. The bliss point depends on realizations of the stochastic process generating labor income and a random shock. The model predicts consumption and labor income share a common trend and that a linear combination of current consumption, current labor income, and once lagged consumption is stationary. Empirically, consumption appears more serially correlated than the model is capable of supporting. Further, the volatility of consumption appears sensitive to time variation in real interest rates.