“There is considerable intellectual ferment among political scientists today owing to the fact that the traditional methods of their discipline seem to have wound up in a cul-de-sac. These traditional methods— i.e., history writing, the description of institutions, and legal analysis—have been thoroughly exploited in the last two generations and now it seems to many (including myself ) that they can produce only wisdom and neither science nor knowledge. And while wisdom is certainly useful in the affairs of men, such a result is a failure to live up to the promise in the name political science.” —William H. Riker1

“Few, if any, research workers in the empirical field of economic science, have had so many successors and such a large impact . . .”. This was the conclusion of the press release in which the Royal Swedish Academy of Sciences motivated its decision to award the 1980 Nobel Prize in Economic Science to Lawrence Klein. Indeed, to this day, the way applied research is conducted, forecasts made and economic policy debated owes perhaps more to Klein than to any other economist. An outstanding scholar and prolific writer, between 1943 and 2012 Klein authored over 350 articles and some twenty volumes, and also edited as many works. But Lawrence Klein was much more than this. In many ways his role can be likened to that of the master craftsman, whose workplace was a beehive of constant activity. His was a “workshop”, or rather several workshops, in which those who had the good fortune to take part ended up acquiring the “craft”, learning not only how to view the economic system using the instruments of theory, but also, and perhaps above all, how to create and utilize new quantitative tools for analysing its operation, to design forecasting scenarios and to derive practical indications for economic policy. Certainly,

relationship have been interpreted as suggesting the degree of unemployment and idle capacity requisite for the achievement of a chosen rate of change of prices, usually fixed at zero.1 It is apparent that the Phillips curve has been absorbed rather rapidly by the profession, a tribute both to the great insight furnished in Professor Phillips' original article [5] and also to the high quality of the subsequent literature. Obviously such an important idea as this, especially with the strong policy implications that seem to follow from it, needs careful examination. There is a tendency in some circles not merely to regard the Phillips relationship as a brilliant hypothesis to help explain the rate of change of prices but rather to view it as a well-established empirical fact with obvious and direct implications for policy. This being the case it is imperative that the concept be subject to intensive scrutiny; to date, practically all of the literature has been concerned with the statistical significance of the relationship. In this article we do not directly concern ourselves with this aspect of the problem, but seek to probe rather more deeply into the theoretical underpinnings of the relationship than has hitherto been done. First of all we shall seek to establish the relationship between the Phillips curve and conventional economic analysis. Then we shall show how a generally negative relationship between the level of unemploynent and the rate of wages may be derived from orthodox dynamic market analysis. However, we shall argue that the particular form of the lThough the Phillips relationship deals with the rate of change of money wages, in policy discussions it is the rate of change of prices that is generally thought of as being important, and indeed some contemporary elementary textbooks substitute prices for wages in their discussion of the relationship (cf. as an example, Lloyd G.

n a pioneering paper in 1958 Phillips [6] advanced the proposition that in the United Kingdom there is a statistically significant relationship between the level and the rate of change of unemployment (U and A U) and the rate of change of money wage rates (AW) which has been remarkably stable during the hundred years since 1862.1 Phillips, Lipsey [5] and others have advanced theoretical grounds on which it has been concluded that unemployment is the causal variable in the observed relationship. There is reason to believe that this proposition is widely accepted today and there is evidence to suspect that it has reinforced arguments in favour of controlling the price level through the level of unemployment. The Phillips hypothesis has been the subject of considerable discussion. Kaldor [3] in 1959 accepted the empirical evidence which supports it but disputed the postulated chain of causation. His argument may be taken to mean that the observed relationship between AW and U is consistent with the hypothesis of no causal connection between the two variables since, within certain limits, both could be concomitants of variations in the level of activity. Dicks-Mireaux and Dow [1] in 1959, Hines [2] in 1964, and others have drawn attention to factors such as the rate of change of the price level (AP) and the rate of change of the percentage of the labour force unionised (AT) which may affect AW independently of U and AU. Knowles and Winsten [4] in 1959, doubted whether the results of Phillips had any implication for public policy. They observed that, on his own data, the critical range of unemployment, between 0 and 3 'A per cent of the labour force, is compatible with any range of inflation between 2 per cent and 28 per cent per annum, while a stable wage level is compatible with between 2 per cent and 22 per cent of the labour force being unemployed. In this paper, we propose to re-examine the hypothesis and the statistical evidence concerning the relationship between the level of unemployment and the rate of change of money wage rates. Specifically, it will be shown that although there was a strong relationship between unemployment and changes in money wage rates in the 19th century, in subsequent years, the association has been very much weaker. Moreover, in the post 19th century years, the level of unemployment does not make a significant contribution to the explanation of the variance in money wage rates in models which include such variables as changes in the cost of living and the level and the rate of change of unionisation. Further, when the coefficients of the unemployment variables are used to predict subsequent values of AW conditional on U and AU, rather poor predictions are obtained. It will be suggested that there are good reasons why these results should have been obtained. In the years since the 19th century, new institutions and relationships have come to dominate the wage bargain. Since unemployment is now a relatively unimportant determinant of wage rate changes, its role in the control of wage inflation must in consequence be severely reduced.

ing from the household-level, Figure 3.1 shows a high degree of comovement between cross-sectional means of perceptions and expectations. The correlation between the series is 0.89, the root mean squared error (RMSE) is 0.59%. Pronounced deviations are only apparent at the beginning and towards the end of the sample. The absolute deviation attains a maximum in 09/2008, when perceptions exceed expectations by 2.2%. The figure also shows the contemporaneous and 12 months ahead HICP inflation rate. Perceptions and expectations both track contemporaneous HICP inflation quite closely, with the respective correlation coefficients being 0.76 and 0.70. The figure further indicates that expectations are only weakly correlated with 12 months ahead realized HICP inflation: The correlation coefficient is 0.25, the RMSE is 1.07%. Hence, the mean of inflation expectations is more closely related to the mean of inflation perceptions than to the Note that this rise in the mean of perceptions is atypical in the sense that the mean of expectations exceeds the mean of perceptions in 129 out of 154 months. Chapter 3. A Mixture Model of Survey Heterogeneity 68

While the early history of the Phillips curve up to 1975 is well known, less well understood is the post-1975 fork in the road. The left fork developed a theory of policy responses to supply shocks in the context of price stickiness in the non-shocked sector. Its econometric implementation interacts shocks with backward-looking inertia. The right fork approach emphasizes forward-looking expectations that can jump in response to anticipated policy changes. The left fork approach is better suited to explaining the postwar US inflation process, while the right fork approach is essential for understanding behaviour in economies with unstable macroeconomic environments.

While few doubt that very high inflation is bad for growth, there is less agreement about the effects of moderate inflation. Using panel regressions and allowing for a nonlinear specification, this paper finds a statistically and economically significant negative relationship between inflation and growth, which holds robustly at all but the lowest inflation rates. A "decision-tree" technique identifies inflation as one of the most important determinants of growth. Finally, short-run growth costs of disinflation are only relevant for the most severe disinflations, or when the initial inflation rate is well within the single-digit range.

When the Bank of Sweden established the prize for Economic Science in memory of Alfred Nobel (1968), there doubtless was as there doubtless still remains widespread skepticism among both scientists and the broader public about the appropriateness of treating economics as parallel to physics, chemistry, and medicine. These are regarded as “exact sciences” in which objective, cumulative, definitive knowledge is possible. Economics, and its fellow social sciences, are regarded more nearly as branches of philosophy than of science properly defined, enmeshed with values at the outset because they deal with human behavior. Do not the social sciences, in which scholars are analyzing the behavior of themselves and their fellow men, who are in turn observing and reacting to what the scholars say, require fundamentally different methods of investigation than the physical and biological sciences? Should they not be judged by different criteria?

What is the Phillips Machine? Reza Moghadam and Colin Carter, of the Suntory Toyota International Centre for Economics and Related Disciplines, describe the machine invented by Professor Bill Phillips to model the British economy in the 1940s and its recent restoration.

What has changed since William Riker's statement was written? No doubt Political Science has made considerable headway in going beyond traditional methods. For example, social choice theory, formal models of party systems, and statistical methods for analyzing electoral and roll-call data have made it possible to make scientific progress in the study of democratic institutions and party systems.The authors thank Chris Achen, John Aldrich, Bill Bernhard, Norman Bradburn, Brian Humes, Mark Jones, Richard Lempert, Phil Shively, Joan Sieber, Duncan Snidal, and Paul Wahlbeck for their comments on earlier versions of this paper. They also thank Henry Brady and Jennifer Hochschild for their comments and assistance through this process. We dedicate this paper to the memory and scientific accomplishments of EITM Workshop participant Richard McKelvey.

We study optimal monetary policy design in a simple model that deviates from the linear-quadratic paradigm and provides a rationale for the practice of inflation zone targeting. We show that the presence of either zone-quadratic preferences or a zone-linear relationship between inflation and economic activity provides strong incentives to deviate from conventional linear policies. We calibrate the model based on parameters for the U.S. and the euro area and employ a numerical dynamic programming algorithm to derive the optimal policies. With this algorithm, we examine the role of uncertainty, model structure and relative preference towards economic stability in determining the width of the implied targeted inflation zone. JEL Classification: E31, E52, E58, E61

We numerically find many unstable periodic solutions embedded in a chaotic attractor in a macroeconomic growth cycle model of two countries with different fiscal policies, and we focus on a special type of the unstable periodic solutions. It is confirmed that chaotic behavior represented by the model is qualitatively and quantitatively related to the unstable periodic solutions. We point out that the structure of a chaotic solution is dissolved into a class of finite unstable periodic solutions picked out among a large number of periodic solutions. In this context it is essential for the unstable periodic solutions to be embedded in the chaotic attractor.

We examine semiparametric nonlinear autoregressive models with exogenous variables (NLARX) via three classes of artificial neural networks: the first one uses smooth sigmoid activation functions; the second one uses radial basis activation functions; and the third one uses ridgelet activation functions. We provide root mean squared error convergence rates for these ANN estimators of the conditional mean and median functions with stationary beta-mixing data. As an empirical application, we compare the forecasting performance of linear and semiparametric NLARX models of US inflation. We find that all of our semiparametric models outperform a benchmark linear model based on various forecast performance measures. In addition, a semiparametric ridgelet NLARX model which includes various lags of historical inflation and the GDP gap is best in terms of both forecast mean squared error and forecast mean absolute deviation error.

We document that "persistent and lagged" inflation (with respect to output) is a world-wide phenomenon in that these short-run inflation dynamics are highly synchronized across countries. In particular, the average cross-country correlation of inflation is significantly and systematically stronger than that of output, while the cross-country correlation of money growth is essentially zero. We investigate whether standard monetary models driven by monetary shocks are consistent with the empirical facts. We find that neither the new Keynesian sticky-price model nor the sticky-information model can fully explain the data. An independent contribution of the paper is to provide a simple solution technique for solving general equilibrium models with sticky information. ; Earlier title: Inflation and money: a puzzle

We describe and contrast several different bootstrap procedures for penalized spline smoothers. The bootstrap methods considered are variations on existing methods, developed under two different probabilistic frameworks. Under the first framework, penalized spline regression is considered as an estimation technique to find an unknown smooth function. The smooth function is represented in a high-dimensional spline basis, with spline coefficients estimated in a penalized form. Under the second framework, the unknown function is treated as a realization of a set of random spline coefficients, which are then predicted in a linear mixed model. We describe how bootstrap methods can be implemented under both frameworks, and we show theoretically and through simulations and examples that bootstrapping provides valid inference in both cases. We compare the inference obtained under both frameworks, and conclude that the latter generally produces better results than the former. The bootstrap ideas are extended to hypothesis testing, where parametric components in a model are tested against nonparametric alternatives. Datasets and computer code are available in the online supplements.

We consider model selection for non-linear dynamic equations with more candidate variables than observations, based on a general class of non-linear-in-the-variables functions, addressing possible location shifts by impulse-indicator saturation. After an automatic search delivers a simplified congruent terminal model, an encompassing test can be implemented against an investigator’s preferred non-linear function. When that is non-linear in the parameters, such as a threshold model, the overall approach can only be semi-automatic. The method is applied to re-analyze an empirical model of real wages in the UK over 1860‐2004, updated and extended to 2005‐2011 for forecast evaluation.

We all look for patterns to make sense out of life. Economists are no different in this respect from anyone else. It is the location of that search rather than the process itself that distinguishes them from other sifters of data. The danger is that the need to order that environment may lead to creating and preserving tools well past their usefulness. Even worse, we may come to believe that our own constructs, these very same tools, represent some inherent and invariant natural relationship. By doing so, we blind ourselves to the ever changing pattern of economic relationships.

Wages are an element of cost crucially aecting the competitiveness of individual firms. But the wage bill is also a crucial element of aggregate demand. Hence it could be that more "flexible" and fluid labour markets, while allowing for faster inter-firm reallocation of labour, may also render the whole economic system more fragile, more prone to recession, more volatile. In this work we investigate some conditions under which such a conjecture applies. The paper presents an agent- based model that investigates the effects of two "archetypes of capitalism", in terms of regimes of labour governance - defined by the mechanisms of wage determination, firing, labour protection and productivity gains sharing - upon (i) labour market regularities and (ii) macroeconomic dynamics (long-term rates of growth, GDP uctuations, unemployment rates, inequality, etc..). The model is built upon the "Keynes meets Schumpeter" family of models (Dosi et al., 2010), explicitly incorporating different microfounded labour market regimes. Our results show that seemingly more rigid labour markets and labour relations are conducive to coordination successes with higher and smoother growth.

Wage growth has declined markedly in Australia over the past few years. At the same time, stronger growth in labour productivity has worked to contain growth in labour costs. These developments reflect several factors, including spare capacity in the labour market, a decline in inflation expectations, a lower terms of trade and the need for the real exchange rate to adjust to improve international competitiveness. The size of the decline in wage growth has been larger than simple historical relationships would suggest, which might be explained by various characteristics of the current episode.

Unemployment is one of the most important issues in macro economics. Unemployment creates many economic and social problems in the economy. This is inevitable to address this issue by means of identifying the causes which influence the level of employment. This paper determines the factors that influence the employment level in Pakistan. Four important independent variables are selected as determinants which include GDP Growth rate, inflation, FDI and Population growth rate. The correlation and multiple regression analysis reveal that GDP Growth rate and inflation have no significant relationship with the Unemployment. However, FDI and Population growth rate have significant and negative relationship with unemployment.