Thomas Sargent

8/3/2019 Thomas Sargent

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All scholars strive to make important contributions to their discipline. Thomas

Sargent irrevocably transformed his.

In the early 1970s, inspired by the groundbreaking work of Robert Lucas,

Sargent and colleagues at the University of Minnesota rebuilt macroeconomic

theory from its basic assumptions and micro-level foundations to its broadest

predictions and policy prescriptions.

This rational expectations revolution, as it was later termed, fundamen-

tally changed the theory and practice of macroeconomics. Prior models had

assumed that people respond passively to changes in fiscal and monetary policy;

in rational expectations models, people behave strategically, not robotically.

The new theory recognized that people look to the future, anticipate howgovernments and markets will act, and then behave accordingly in ways they

believe will improve their lives.

Therefore, the theory showed, policymakers cant manipulate the

economy by systematically tricking people with policy surprises. Central banks,

for example, cant permanently lower unemployment by easing monetary policy,

as Sargent demonstrated with Neil Wallace, because people will (rationally)

anticipate higher future inflation and will (strategically) insist on higher wages

for their labor and higher interest rates for their capital.

This perspective of a dynamic, random macroeconomy demanded deeper

analysis and more sophisticated mathematics. Sargent pioneered the developmentand application of new techniques, creating precise econometric methods to test

and refine rational expectations theory.

But by no means has Sargent limited himself to rational expectations.

Among his dozen books and profusion of research articles are key contributions

to learning theory (the study of the foundations and limits of rationality) and

to economic history, including influential work on monetary standards and

international episodes of inflation.

Interviewed here by now-retired Research Director Art Rolnick, a

colleague since the 1970s at the University of Minnesota and Minneapolis Fed,

Sargent explores issues ranging from polar models of banking regulation and

crisis to causes of persistently high unemployment to a compelling defense of

modern macro. Underlying the entire conversation is the vocabulary of rational

expectations, observes Sargent. In our dynamic and uncertain world, our beliefs

about what other people and institutions will do play big roles in shaping our

behavior.

SEPTEM

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Thomas Sargent

Photography by Peter Tenzer


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MODERN MACROECONOMICS

UNDER ATTACK

Rolnick: You have devoted your profes-sional life to helping construct and teachmodern macroeconomics. After the

financial crisis that started in 2007,modern macro has been widely attackedas deficient and wrongheaded.

Sargent: Oh. By whom?

Rolnick: For example, by Paul Krugmanin the New York Times and Lord RobertSkidelsky in the Economist and else-where. You were a visiting professor atPrinceton in the spring of 2009. Alongwith Alan Blinder, Nobuhiro Kiyotakiand Chris Sims, you must have dis-

cussed these criticisms with Krugman atthe Princeton macro seminar.

Sargent: Yes, I was at Princeton then andattended the macro seminar every week.Nobu, Chris, Alan and others alsoattended. There were interesting discus-sions of many aspects of the financialcrisis. But the sense was surely not thatmodern macro needed to be recon-structed. On the contrary, seminar par-ticipants were in the business of usingthe tools of modern macro, especiallyrational expectations theorizing, to shed

light on the financial crisis.

Rolnick: What was Paul Krugmans opin-ion about those Princeton macro semi-nar presentations that advocated mod-ern macro?

Sargent: He did not attend the macroseminar at Princeton when I was there.

Rolnick: Oh.

Sargent: I know that Im the one who is

supposed to be answering questions, butperhaps you can tell me what popularcriticisms of modern macro you have inmind.

Rolnick: OK, here goes. Examples ofsuch criticisms are that modern macro-economics makes too much use of

sophisticated mathematics to modelpeople and markets; that it incorrectly

relies on the assumption that asset mar-kets are efficient in the sense that assetprices aggregate information of all indi-viduals; that the faith in good outcomesalways emerging from competitive mar-kets is misplaced; that the assumption ofrational expectations is wrongheadedbecause it attributes too much knowl-edge and forecasting ability to people;that the modern macro mainstay realbusiness cycle model is deficientbecause it ignores so many frictions andimperfections and is useless as a guide

to policy for dealing with financialcrises; that modern macroeconomicshas either assumed away or short-changed the analysis of unemployment;that the recent financial crisis tookmodern macro by surprise; and thatmacroeconomics should be based lesson formal decision theory and more on

the findings of behavioral economShouldnt these be taken seriously?

Sargent: Sorry, Art, but aside fromfoolish and intellectually lazy remabout mathematics, all of the critic

that you have listed reflect either woignorance or intentional disregardwhat much of modern macroeconois about and what it has accomplisThat said, it is true that modern maeconomics uses mathematics and sttics to understand behavior in situawhere there is uncertainty about the future will unfold from the pasta rule of thumb is that the more dynic, uncertain and ambiguous is thenomic environment that you seemodel, the more you are going to

to roll up your sleeves, and learn andsome math. Thats life.

Rolnick: Putting aside fear and irance of math, please say more abouother criticisms.

Sargent: Sure. As for the efficient mkets hypothesis of the 1960s, premember the enormous amoungood work that responded to Haand Singletons ruinous 1983[ Journal of Political Economy] finthat standard rational expectations

pricing theories fail to fit key featurthe U.S. data.1 Far from taking the cient markets outcomes for graimportant parts of modern macroabout understanding a large and iesting suite of asset pricing puzbrought to us by Hansen and Singland their followerspuzzles aempirical failures of simple versioefficient markets theories. Here I in mind papers on the equity prempuzzle, the risk-free rate puzzle,Backus-Smith puzzle, and on and

These papers have put interenew forces on the table that can explain these puzzles, including mimarkets, enforcement and informaproblems that impede trades, diffestimation and inference problems fronting agents, preference specificawith novel attitudes toward the tim

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It is true that modern macroeconomics

uses mathematics and statistics tounderstand behavior in situations where

there is uncertainty about how the future

will unfold from the past. But a rule of

thumb is that the more dynamic, uncertain

and ambiguous is the economic environment

that you seek to model, the more you are

going to have to roll up your sleeves, and

learn and use some math.


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and persistence of risk, and pessimismcreated by ambiguity and fears of modelmisspecification.

Rolnick: Tom, let me interrupt. Whyshould we at central banks care about

whether and how those rational expec-tations asset pricing theories can berepaired to fit the data?

Sargent: Well, there are several impor-tant reasons. One is that these theoriesprovide the foundation of our ways ofmodeling the main channels throughwhich monetary policys interest ratedecisions affect asset prices and the realeconomy. To put it technically, the newKeynesian IS [investment-savings] curveis an asset pricing equation, one of a

form very close to those exposed asempirically deficient by Hansen andSingleton. Efforts to repair the assetpricing theory are part and parcel of theimportant project of building an econo-metric model suitable for providingquantitative guidance to monetary andfiscal policymakers.

Another important reason for caringis that monetary policymakers haveoften been urged to arrest bubbles inasset markets. Easier said than done.Before you can do that, you need aquantitatively reliable theory of asset

prices that you can use to identify andmeasure bubbles.

Rolnick: Before I interrupted, you hadbegun responding to those criticisms ofmodern macro. Please continue.

Sargent: I have two responses to yourcitation of criticisms of rational expec-tations. First, note that rational expec-tations continues to be a workhorseassumption for policy analysis bymacroeconomists of all political persua-

sions. To take one good example, in thespring of 2009, Joseph Stiglitz andJeffrey Sachs independently wrote op-edpieces incisively criticizing the Obamaadministrations proposed PPIP (Public-Private Investment Program) for jump-starting private sector purchases of toxicassets.3 Both Stiglitz and Sachs execut-

ed a rational expectations calculation tocompute the rewards to prospectivebuyers. Those calculations vividlyshowed that the administrations pro-posal represented a large transfer of tax-payer funds to owners of toxic assets.

That analysis threw a floodlight ontothe PPIP that some of its authors did notwelcome.

And second, economists have beenworking hard to refine rational expecta-tions theory. For instance, macroecono-mists have done creative work thatmodifies and extends rational expecta-tions in ways that allow us to under-stand bubbles and crashes in terms ofoptimism and pessimism that emergefrom small deviations from rationalexpectations. An influential example of

such work is the 1978 QJE [QuarterlyJournal of Economics] paper by Harrisonand Kreps.4 You should also look at afascinating paper that builds onHarrison and Kreps, written by JoseScheinkman and Wei Xiong in the 2003JPE.5 As I mentioned earlier, for policy-makers to know whether and how theycan moderate bubbles, we need to havewell-confirmed quantitative versions ofsuch models up and running. We dontyet, but we are working on it.

Rolnick: And the other criticisms?

Sargent: OK. The criticism of real busi-ness cycle models and their closecousins, the so-called New Keynesianmodels, is misdirected and reflects amisunderstanding of the purpose forwhich those models were devised.6

These models were designed to describeaggregate economic fluctuations duringnormal times when markets can bringborrowers and lenders together inorderly ways, not during financial crisesand market breakdowns.

By the way, participants within boththe real business cycle and newKeynesian traditions have been sternand constructive critics of their ownworks and have done valuable creativework pushing forward the ability ofthese models to match important prop-erties of aggregate fluctuations. The

authors of papers in this literature ally have made it clear what the mo

are designed to do and what theynot. Again, they are not designed ttheories of financial crises.

Rolnick: What about the most sercriticismthat the recent financialsis caught modern macroeconomicsurprise?

Sargent: Art, it is just wrong to saythis financial crisis caught momacroeconomists by surprise. statement does a disservice to an im

tant body of research to which respoble economists ought to be direpublic attention. Researchers havetematically organized empirical dence about past financial and exchcrises in the United States and abrEnlightened by those data, researchave constructed first-rate dyn

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29 SEPTEM

It is just wrong to say that this financia

crisis caught modern macroeconomistsby surprise. ... Researchers have system

cally organized empirical evidence abou

past financial and exchange crises in th

United States and abroad. Enlightened

those data, researchers have constructe

first-rate dynamic models of the causes

of financial crises and government poli

that can arrest them or ignite them.


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models of the causes of financial crisesand government policies that can arrestthem or ignite them. The evidence andsome of the models are well summa-rized and extended, for example, inFranklin Allen and Douglas Gales 2007

book Understanding Financial Crises.7Please note that this work was availablewell before the U.S. financial crisis thatbegan in 2007.

Rolnick: Ill come back to that in a sec-ond, but you havent said anything yetabout what is to be gained in terms ofunderstanding financial crises fromimporting insights of behavioral eco-nomics into macroeconomics.

Sargent: No, I havent.

FINANCIAL CRISES

Rolnick: OK then. Well, what usefulthings does macroeconomics have tosay about financial crises, what causesthem, how to manage them after theystart and what can be done to preventthem?

Sargent: A lot. In addition to the formalliterature summarized in the Allen andGale book, I want to mention the exam-ple of the 2004 book by Gary Stern and

Ron Feldman, Too Big to Fail.8 Thatbook doesnt have an equation in it, butit wisely uses insights gleaned from theformal literature to frame warningsabout the time bomb for a financial cri-sis set by government regulations andpromises. Indeed, one of the focuses ofGary Sterns long tenure as president ofthe Minneapolis Fed was steadily todraw attention to financial fragilityissues and what the government doeseither to arrest crises or, unfortunatelyas an unintended consequence, to incu-

bate them.

Rolnick: Thanks for the nice words aboutGary, but please elaborate further onmacro scholarship and financial crises.

Sargent: I like to think about two polarmodels of bank crises and what govern-

ment lender-of-last-resort and depositinsurance do to arrest them or promotethem. Both models had origins inpapers written at the Federal ReserveBank of Minneapolis, one authored byJohn Kareken and Neil Wallace in 1978and the other by John Bryant in 1980,then extended by Diamond and Dybvigin 1983.9 I call them polar models

because in the Diamond-Dybvig andBryant model, deposit insurance is pure-ly a good thing, while in the Kareken andWallace model, it is purely bad. Thesedifferences occur because of what thetwo models include and what they omit.

The Bryant and Diamond-Dybvigmodel starts with an environment in

which banks can do things that areworthwhile socially; namely, they vide maturity transformation anduidity transformation activities improve the efficiency of the econoThey enable coalitions of people, na

ly, the banks depositors, to make lterm investmentsloans, mortgand the likewhile at the same timbanks depositors hold demand depbank liabilities that are short terduration, because they can withthem at any time. Banks thereby fatate risk-sharing among people uncertain future liquidity needs. Tare all good things.

But there is a potential problem because for the long-term investmto come to fruition, enough padepositors must leave their funds inbank to avoid premature liquidationbanks long-term investments. Witdeposit insurance, situations can that induce even patient depositowant to withdraw their funds ecausing the banks prematurely to ldate the long-term investments, adverse affects on the realized retur

What triggers a bank run is padepositors private incentive to wdraw early when they think that opatient investors are also choosinwithdraw early. Technically spea

that amounts to multiple Nash equria. There are situations in which I(i.e., withdraw from the bank ebecause I expect you to run, and wyou also run because you expect mrun. But there are other situationwhich we both trust that the otherson isnt going to run and we dontWhich equilibrium prevails is anyoguess, or something resolved only bextraneous random device for corring behavior, a device that economsometimes call a sunspot.

So without deposit insuranceeconomy is vulnerable to bank The situations where depositors run lead to good outcomes, but wthere are bank runs, outcomes areThe good news in the Diamond-Dyand Bryant model, however, is thyou put in government-supplied de

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30SEPTEMBER 2010

One of the focuses of Gary Sterns long

tenure as president of the Minneapolis

Fed was steadily to draw attention to

financial fragility issues and what the

government does either to arrest crises

or, unfortunately as an unintended

consequence, to incubate them.

Without deposit insurance, the economy

is vulnerable to bank runs. ... The good

news in the Diamond-Dybvig and Bryant

model, however, is that if you put in

government-supplied deposit insurance ...

people dont initiate bank runs becausethey trust that their deposits are safely

insured.


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insurance, that knocks out the bad equi-librium. People dont initiate bank runsbecause they trust that their deposits aresafely insured. And a great thing is thatit ends up not costing the governmentanything to offer the deposit insurance!

Its just good all the way around.

Rolnick: Do you think that an abstractmodel like this ever influences policy-makers?

Sargent: I believe that the Bryant-Diamond-Dybvig model has been veryinfluential generally, and in particularthat it was very influential in 2008among policymakers. A perhaps over-simplified but I think largely accurateway of characterizing the vision of manypolicy authorities in 2008 was that theycorrectly noticed that a Bryant-Diamond-Dybvig bank is not just some-thing that has B A N K written on itsstationary and front door. Its any insti-tution that executes liquidity transfor-mation and maturity transformation,thereby offering a kind of intertemporalrisk-sharing.

So in 2008, there were all sorts ofinstitutions that were really banks in theeconomic sense of the Bryant-Diamond-Dybvig model but that didnot have access to explicit deposit insur-

ance, institutions like money marketmutual funds, shadow banks, evenhedge funds that were doing exactlythose maturity-transforming and risk-transforming activities.

When monetary policy authorities,deposit insurance authorities and otherslooked out their windows in the fall of2008, they saw Bryant-Diamond-Dybvigbank runs all over the place. And thelogic of the Bryant-Diamond-Dybvigmodel persuaded them that if theycould arrest the runs by effectively con-

vincing creditors that their loansthatis, their short-term depositsto thesebanks were insured, that could bedone at little or no eventual cost to thetaxpayers. You could nip the run in thebud and really prevent the next GreatDepression. This is a very optimistic view of those 2008 interventions

enlightened by the Bryant and Diamond-Dybvig model.

But Diamond and Dybvig them-selves were cautious about promotingsuch optimism. In the last part of their1983 JPE paper, Diamond and Dybvig

recommend that their readers takeseriously the message of a 1978 paper(written at the Minneapolis Fed, as Imentioned earlier) by Kareken andWallace. That paper includes some-thing important that Diamond andDybvig recognize that they left out:moral hazard.

Rolnick: And the Kareken-Wallace story?

Sargent: The main idea is that when agovernment is in the business of being alender of last resort or a deposit insurer,depending on how it regulates banks, itaffects the risk that banks take and theprobability that the government is actu-ally going to be required to exerciselender-of-last-resort and bail out facili-ties. Neil and Jack call it the moral haz-ard problem, which is the idea thatwhen you insure a bank, you alter itsincentives to undertake risks.

In the Kareken-Wallace model, depositinsurance is purely a bad thing.Kareken-Wallace envisions a differenteconomic setting than Bryant and

Diamond-Dybvig. Of course, like allmodels, its an abstraction; it simplifiesthings in order to isolate key forces. TheKareken-Wallace setting has completemarkets. There are markets in all possi-ble risky claims. There are also somepeople who wanted to hold risk-freedeposits.

Kareken and Wallace compare twodifferent situations. In one, there is nodeposit insurance; depositors are ontheir own and know that their depositsare uninsured. If they want to hold risk-

free deposits, theyd better hold them inbanks that are holding risk-free portfo-lios. Some very conservative banksemerge that can issue safe depositsbecause the bank portfolio managersthemselves hold assets that allow thesebanks to pay depositors in all possiblestates of the world.

Kareken and Wallace compareno-deposit-insurance situationanother situation in which a govment agency provides deposit insurthat is either free or is priced too chly, meaning that its not priced w

proper risk-loading. Kareken Wallace show that in that situabanks have an incentive to becomrisky as possible, and as large as pble. Therefore, with a positive probity, banks will fail and taxpayershave to compensate banks depositois in banks shareholders interest

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The Kareken and Wallace models predi

is that if a government sets up deposit

insurance and doesnt regulate bank

portfolios to prevent them from taking

much risk, the government is setting th

stage for a financial crisis. ... So, of thos

two models, the Kareken-Wallace mode

makes you very cautious about lender-o

last-resort facilities and very sensitive t

the risk-taking activities of banks. The

Diamond-Dybvig and Bryant model mak

you very sensitive to runs and very

optimistic about the ability of insurance

to cure them. Both models leave sometout, and I think in the real world were

a situation where we have to worry abo

runs and we also have to worry about

moral hazard.


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the banks organize themselves this way.This lets them gamble with the insurersand depositors money.

The Kareken and Wallace modelsprediction is that if a government setsup deposit insurance and doesnt regu-

late bank portfolios to prevent themfrom taking too much risk, the govern-ment is setting the stage for a financialcrisis. On the basis of the Kareken-Wallace model, Jack Kareken wrote apaper in the Federal Reserve Bank ofMinneapolis Quarterly Review referringto the cart before the horse.10 Hepointed out that if youre going toderegulate financial institutions, whichwe in the United States did in the late70s and early 80s (deregulation is thecart), youd better reform deposit insur-ance first (thats the horse). Youd bettermake it clear that financial institutionsthat take these risks are not allowed tohave access to lender-of-last-resortfacilities. But the U.S. government didntdo that.

So, of those two models, the Kareken-Wallace model makes you very cautiousabout lender-of-last-resort facilities andvery sensitive to the risk-taking activitiesof banks. The Diamond-Dybvig andBryant model makes you very sensitive toruns and very optimistic about the abili-ty of insurance to cure them. Both mod-

els leave something out, and I think inthe real world were in a situation wherewe have to worry about runs and we alsohave to worry about moral hazard. Asyou know, an important theme ofresearch for macroeconomics in generaland at the Minneapolis Fed in particularhas been about how to strike a good bal-ance.

Rolnick: Jack and Neil concluded their1978 paper with a proposal for dealingwith this tension, and that was to

require much more capital than wasrequired at the time. Now the govern-ment actually requires even less capitalthan it did when Jack and Neil wrote. Ifyou go back prior to FDIC insurance,turn-of-the-century banks were hold-ing, by some estimates, 20 percent,maybe 30 percent, capital. Capital-equity

ratios were that high.What would you recommend? You

just observed that if deposit insuranceisnt priced properly, that leads you inone direction. And Jack and Neil hadthis idea of making sure theres a lot

more skin in the game, meaning muchcloser to what banks used to hold whenthere was no deposit insurance, no too-big-to-fail.

Sargent: The function of capital is exact-ly to protect against making risky loans.Another proposal is the narrow bankingproposal of Milton Friedman and [othereconomists at the University of]Chicago, which is a proposal to forcedeposit banks to hold safe portfolios.

Rolnick: Well, with large banks, too-big-to-fail concerns and deposit insurance, Iwould make the case to tier it based onsize. Jack and Neil made the point, Ibelieve, that shareholders of large bankscan diversify, but shareholders of small-er banks find it harder to diversify, sothey tend to be more risk-averse. Theirprediction would therefore have been, Ithink, that moral hazard is more likelyto manifest itself in larger banksand Ithink thats what we saw in the 2007-09financial crisis. How seriously wouldyou take the relevance of the historical

evidence that I cited?

Sargent: I would take it very seriously. Irecommend a very interesting paper byWarren Weber presented at theMinneapolis Fed conference in honor ofGary Stern this past April in whichWarren compared different privateinsurance arrangements for managingbanks risk-taking before the U.S. CivilWar.11

THE 2009 FISCAL STIMULUS

Rolnick: A January 2009 article quotesyou as saying, The calculations that Ihave seen supporting the stimulus pack-age are back-of-the-envelope ones thatignore what we have learned in the last60 years of macroeconomic research.12

What calculations had you seen?

Sargent: I said something like that

reporter. I had just read an Obadministrations Council of EconAdvisers document e-mailed to mmy friend [Stanford University ecmist] John Taylor.13 I agreed with that the CEA calculations were suringly naive for 2009. They wereinformed by what we learned after 1

But I suspect that the councilasked to do something quickly, anddid what they thought was genough for government work, as sof us said during my days at

Pentagon in 1968 and 1969. Bacenvelope work can be a useful starpoint or benchmark. But it does chief when it is oversold.

In early 2009, President Obamasnomic advisers seem to have unstated the substantial professiuncertainty and disagreement abou

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32SEPTEMBER 2010

In early 2009, I recall President Obama

as having said that while there was am

disagreement among economists abou

the appropriate monetary policy and

regulatory responses to the financial cr

there was widespread agreement in fa

of a big fiscal stimulus among the vast

majority of informed economists. His

advisers surely knew that was not an

accurate description of the full range o

professional opinion.


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wisdom of implementing a large fiscalstimulus. In early 2009, I recallPresident Obama as having said thatwhile there was ample disagreementamong economists about the appropri-ate monetary policy and regulatory

responses to the financial crisis, therewas widespread agreement in favor of abig fiscal stimulus among the vastmajority of informed economists. Hisadvisers surely knew that was not anaccurate description of the full range ofprofessional opinion. President Obamashould have been told that there arerespectable reasons for doubting thatfiscal stimulus packages promote pros-perity, and that there are serious eco-nomic researchers who remain uncon-vinced.

Rolnick: Do any New Keynesian modelsprovide any support for the CEA num-bers?

Sargent: Some do; some dont. I recom-mend looking at calculations by JohnTaylor and his pals.14 Based on thatwork, John remains very skeptical of the2009 CEA calculations. But Christiano,Eichenbaum and Rebelo have used vari-ants of a New Keynesian model togeth-er with particular assumptions aboutpaths of shocks to create quantitative

examples of situations in which fiscalmultipliers can be as big as thoseassumed by the CEA.15

PERSISTENT UNEMPLOYMENT IN

EUROPE (AND NOW THE UNITED

STATES?)

Rolnick: Let me go on to another set ofquestions that I have struggled toanswer. Is U.S. unemployment in thisrecession special? Is it different from theprevious 10 recessions? If so, do you

have any explanation for why that mightbe the case? Why it went so high andwhy its staying there as long as it is, rel-ative to the pattern of other recoveries?

I havent heard many economistsexpound on this, but clearly the labormarkets are behaving much differentlythan they did in previous recoveries,

and its not obvious to me why. Im curi-ous what you might say about that.

Sargent: May I talk about this by linkingto some of my work with L arsLjungqvist on European unemploy-

ment?

Rolnick: By all means.

Sargent: I have little new to say aboutthe details of the big rise in U.S. unem-ployment since 2008, although thefinancial crisis was a huge adverse shockto the labor market, so I suspect thatwell be able to explain the rise. But themain thing that concerns me is thethreat ofpersistenthigh unemployment,and here the European experience of the

last three decades fills me with dread.Let me begin by explaining whatmotivated Lars Ljungqvist and me tostudy European unemployment, why wehave been obsessed by it for 15 years. ToLars and me, Europes high unemploy-ment rate during the last three decadesrepresents an enormous waste of humanresources and individuals well-being,what we think is a tragedy in the lives ofthe people who have not been able toparticipate in the labor market.

Early explanations in the 1980s forEuropes high unemployment were that

it was due to insufficient demand andwage rigidities. But soon those explana-tions came to be regarded as unsatis-factory because they couldnt explain thepersistence of unemployment. Sometheories blamed Europes labor marketinstitutions withtheir generous government-supplied unemployment insurance andstrong government-mandated job pro-tection.

But those theories were decisivelycriticized by Paul Krugman and otherswho pointed out that the European

institutions that liberally subsidizedunemployment and disability retire-ment were there also in the 1950s and60s, periods when Europe had lowerunemployment rates than the UnitedStates. Therefore, Krugman and othersconcluded that you cant blame thosegenerous European social safety nets for

the high unemployment rates Europe has experienced since 1980

Heres how Lars and I have attathe problem. We believe that deKrugmans observation, Europes geous unemployment compensation

tem has made an important contrtion to sustained high European unployment, but that those adverse efcame to life only after there occuwhat seem to have been permachanges in the microeconomic enviment confronting individual worSo the culprit was the interactionthose altered microeconomic condiwith those generous European socialty nets.

Rolnick: What changes in micro

nomic conditions do you have in m

Sargent: Empirical microeconomhave documented that, despite macroeconomists called the GModeration in macroeconomic voity before 2007, individual workers experienced more turbulent labor ket outcomes since the late 1970searly 80s. Empirical studies have dmented increased volatility of bothtransient and permanent componenindividuals labor earnings. PGottschalk and Robert Moffitt, Co

Meghir and Luigi Pistaferri, and othave documented that.16 David Aand Larry Katz have assembled a vincing catalogue and critical summof the evidence.17 So if you looinstances when a job separation caan individuals earnings to suffer reduction, usually that individual mlive with a substantial reduction flong time.

Lars and I use the shorthincreased turbulence to refer toincreased volatility and magnitud

adverse earnings shocks at the timjob loss. In the context of several ratal expectations models with humanital dynamics and labor market frictthat impede the ability of displworkers to find new jobs, we have fothat an increase in economic turbulgenerates persistently high unemp

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ment when combined with a generouswelfare system.

Furthermore, the same government-financed social safety net could actuallyproduce lower unemployment in a low-turbulence environment like the 1950s

and 1960s. It could do this through stronggovernment-mandated job protection.But when the microeconomic turbulenceincreases to the high-turbulence post-1980 environment, that same safety netcan unleash persistently higher unem-ployment. An important element of ouranalysis is the view that a workershuman capital tends to grow when he orshe is employed, but deteriorates whenhe or she is not employed. We analyzedthese mechanisms in detail in twopapers, one in the JPE in 1998, anotherin Econometrica in 2008.18

Thats our explanation for the higherunemployment rate observed in Europefrom 1980 to 2007. Our vision is that anincrease in microeconomic turbulenceof individual earnings processesoccurred in both Europe and the UnitedStates. Displaced American workersfaced stingier unemployment compen-sation systems, stingier in both theirmore limited durations and their lowermonthly payments.

Rolnick: When did the microeconomic

turbulence begin?

Sargent: The empirical evidence is thatit increased substantially sometime inthe late 1970s. It happens that itincreased just about when high and per-sistent unemployment broke out inEurope. This is what attracted us to it asa key part of the explanation for the per-sistent jump in unemployment inEurope relative to the United States.

Rolnick: So turbulence broke out in

Europe, OK, but you get the impressionthat the Great Moderationa decline ineconomic volatilitywas taking placehere in the United States.

Sargent: Well, the so-called GreatModeration really refers to a decrease inmacroeconomic volatility. Thats why I

stress the difference between individualand aggregate volatility by emphasizingthe term microeconomic. The Great

Moderation is indeed there in the aggre-gate data. An econometrician wouldthink about running a simple auto-regressive process for aggregate dataand then looking at the error variance.For aggregate data (until 2007), thaterror variance decreased. But for themicro or individual-level data, just theopposite happened: For individualworkers, the error varianceor lesstechnically, unpredictable volatility inearningsincreased.

Rolnick: And why did microeconomicearnings volatility increase?

Sargent: Lars and I believe that whenpeople now become unemployed,theyre taking a more or less permanenthit to their level of human capital, a larg-er one than they might have received

before 1980. We have a theory that ple build up human capital while thworking on a job, but lose human tal when theyre displaced from aWe think that after 1980, peopWestern economies started suffe

bigger drops in their human capitthe moment that they suffer a jobplacement. Some of the forces leadithis outcome come from various tnological changes going underumbrella name of globalization.

Thomas Friedmans 2005 bookWorld Is Flathas many stories testifto such forces.19 By positing increturbulence in this sense at the meconomic level, Lars and I have able both to come to grips withobservations on aggregate unemp

ment across Europe and the UStates and also to explain some omicro observations collected Gottschalk and Moffitt and otherthe Great Moderation seems not to been occurring at the individual lJust the opposite.

Our theory goes beyond the aggate unemployment rate and focuseindividuals. Our models have cohoraging heterogeneous workers. models imply that people in Euespecially older workers, are suffefrom long-term unemployment bec

of the adverse incentives brought aby a generous social safety net whinteracts with these human cadynamics. Unfortunately, the data this out. In Europe, there has belong-term unemployment proespecially affecting older workers.

Rolnick: In your model, what typlabor market frictions impede pewho want to work from immedifinding a job?

Sargent: The models that we like beour purposes view unemployment activity distinct from work leisure. Weve cast the heart of ourory in several contexts, includingexample, search models in the spirGeorge Stigler and John McCwhere finding a job requires a t

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34SEPTEMBER 2010

After 1980, people in Western economies

started suffering bigger drops in their

human capital at the moment that they

suffer a job displacement. Some of the

forces leading to this outcome come from

various technological changes going under

the umbrella name of globalization.

Thomas Friedmans 2005 book The

World Is Flat has many stories testifying

to such forces.


10/14

consuming activity of sorting throughoffers for jobs with various levels of payand compensating differences; and alsoDiamond-Mortensen-Pissarides21

matching models where an aggregatematching function imposes a conges-

tion externality on workers activity ofwaiting for a match and firms activity ofwaiting for vacancies to be filled. Thesame forces come through across a vari-ety of structures, so we think theres a lotof robustness to our basic story.

Rolnick: OK, so part of your story forlower U.S. unemployment in the pasthas to be that in the United States, espe-cially for the older workers, the safetynet wasnt as generous. They had to goback and get retrained or whatever;

therefore, they chose to be more activein the labor market than their Europeancousins did.

Sargent: Yes. In a 2003 paper in a vol-ume to honor Edmund S. Phelps, Larsand I exhibited simulations of ourmodel illustrating this.22 What would atypical, say, 50-year-old worker do if heor she loses his or her job and thenimmediately gets hit by a human capitalloss? What differences in behaviorwould be exhibited by otherwise similarworkers, one facing European benefits

versus another facing U.S. benefits?Our simulations exhibit a force that

traps the European worker in unem-ployment. Unemployment compensationsystems typically award you compensa-tion thats linked to your earnings onyour last job; those past earnings reflectyour past human capital, not your cur-rent opportunities or current humancapital. That can make collecting unem-ployment compensation at rates reflect-ing your past (and now obsolete)human capital more desirable than

accepting a job whose earnings reflect areturn on your current depreciated levelof human capital. This mechanism setsan incentive trap that induces theEuropean worker to withdraw fromactive labor market participation.

Rolnick: Earlier, you said that the

European experience with persistentlyhigh unemployment over the last threedecades fills you with dread about the

prospects for the United States.

Sargent: The prospect that concerns memight sound like Im hardhearted, butthats just the opposite of my feelings.What youve seen in the recent reces-sionand its quite natural because itsbeen so severeis a tendency of

Congress to expand unemploymbenefits, over and over again. Whatand my theory tells us is that if, inUnited States, we create a system wunemployment and disability benare permanently extended in their

erosity and their duration, we will ivertently put ourselves into the situathat much of Europe has sufferedthree decades.

I dont know enough about politipredict whether thats likely to hapThe unfortunate thing is you can multiple equilibrium trap here. unemployment rates enabled the UnStates politically to sustain a mounemployment compensation sysBut the politics of the current situacan imply that so long as unemp

ment is high, were going to extendduration and generosity of benAnd that extension, done out of theof motives, is exactly what can leathe trap of persistently high unempment. An intriguing thing is that sEuropean countries like SwedenDenmark are now moving exactly inopposite direction.

EUROPE AND UNPLEASANT

ARITHMETIC

Rolnick: Let me ask another que

about events in Europe. Some pebelieve theres a serious conflict betwfiscal and monetary policy, that itresult of the Europeans having amonetary policy to do things it without real f iscal discipline. And asand Neil pointed out 30 years agoit that long ago?!in Some UnpleaMonetarist Arithmetic, youd bworry about those links. Is that theyou would interpret whats going oGreece, or Europe in general, and cern over Europes ability to main

the euro, that they face some unpleaarithmetic that could undermineeuro?

Sargent: The people who set up the clearly knew about the unpleasant ametic and they strove to set things uprotect the euro from any adverse

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35 SEPTEM

Collecting unemployment compensation

at rates reflecting your past (and now

obsolete) human capital [can be] more

desirable than accepting a job whose

earnings reflect a return on your current

depreciated level of human capital. This

mechanism sets an incentive trap that

induces the ... worker to withdraw from

active labor market participation.

Low unemployment rates enabled

the United States politically to sustain

a modest unemployment compensation

system. But the politics of the currentsituation can imply that so long as

unemployment is high, were going to

extend the duration and generosity of

benefits. And that extension, done out

of the best of motives, is exactly what

can lead to the trap of persistently high

unemployment.


11/14

sequences of that arithmetic. Indeed, thewhole system was designed to force gov-ernments to balance their budgets in apresent value sense, adjusting appropri-ately for growth. Indeed, the MaastrichtTreaty actually put in fiscal rules that

amounted to overkill in the interests ofcreating a fail-safe system.

What I mean is that it put in placemore restrictive rules on fiscal policythan were needed to express the require-ment that a governments budget had tobe balanced in the present-value sensewith little or no contributions comingfrom seigniorage revenues from theinflation tax. The treaty built redundan-cy into the rules by restricting bothdebt-to-GDP ratios and deficit-to-GDPratios.

Remember that under the gold stan-dard, there was no law that restrictedyour debt-GDP ratio or deficit-GDPratio. Feasibility and credit markets didthe job. If a country wanted to be on thegold standard, it had to balance its budg-et in a present-value sense. If you didntrun a balanced budget in the present- value sense, you were going to have arun on your currency sooner or later,and probably sooner. So, what inducedone major Western country after anoth-er to run a more-or-less balanced budg-et in the 19th century and early 20th

century before World War I was theirdecision to adhere to the gold standard.

Rolnick: What does the gold standardhave to do with the euro in 2010?

Sargent: The euro is basically an artifi-cial gold standard. The fiscal rules in theMaastricht Treaty were designed tomake explicit the present-value budgetbalance that was unspoken under thegold standard. In terms of the mone-tarist arithmetic, the rules made sense.

Rolnick: So whats the problem now?

Sargent: Here is what went haywire. Inthe 2000s, France and Germany, the twokey countries at the center of the Union,violated the fiscal rules year after year.Of course, an intriguing thing about the

unpleasant arithmetic is that its about present values of government primarydeficits, and not just deficits for one, twoor three years. And remember that theoverkill Maastricht Treaty rules are

sufficient but not necessary to sustainpresent-value budget balance, adjustedfor real economic growth, so maybe therewas no cause for alarm at that time.

But in hindsight, there was cause foralarm. The reason is that France andGermany lost the moral authority to saythat they were leading by example. Theylost the moral high ground to holdsmaller countries to the fiscal rulesintended to protect monetary policyfrom the need to monetize governmentdebt.

Rolnick: And so

Sargent: So, a number of countries at theEuropean Union economic peripheryGreece, in particularviolated the rulesconvincingly enough to unleash thethreat of unpleasant arithmetic in those

countries. The telltale signs were perently rising debt-GDP ratios in tcountries. Of course, the unpleaarithmetic allows them to go up fwhile, but if that goes on too long, etually youre going to get a sover

debt crisis.

Rolnick: What could the EuroCentral Bank do then?

Sargent: Well, here is one thing thacan imagine the ECB doing (whihasnt). It could take the stance, Igovernment of Greece wants to trissue euro-denominated bonds, let tdo it, or try to do it. And if invewant to hold euro-denominated bthat are understood to be liabilitithe Greek government, and not oECB, let them do it. Its not any oECBs business. If those bonds threto go bad, if Greece just isnt a goodthats the bondholders problem. Leinvestors bear that risk. And if Grdefaults or renegotiates, thats investors problem, not the ECBs plem.

Rolnick: Of course, the ECB hasntthat, or at least not yet!

Sargent: Well, one reason the ECB h

said that yet is that after the finacrisis of 2008, what seemed to sEuropean banks to be a promsource of higher-yielding instrumwas sovereign debt in the form of edenominated bonds issued by counlike Greece. The banks located incenter of the euro area, FranceGermany, hold Greek-denomindebt, so a threat of default on Greekernment debt threatens the portfolithose banks in other European ctries. Because it is the lender ofresort, now it is the ECBs business.

Rolnick: Tom, this reminds me oexample of a breakdown in one of thebetween monetary and fiscal policyyou wrote about in your paper WheDraw Lines that you presented aStern conference we held in April.23

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36SEPTEMBER 2010

In the 2000s, France and Germany, the

two key countries at the center of the

Union, violated the fiscal rules year after

year. ... They lost the moral high ground

to hold smaller countries to the fiscal rules

intended to protect monetary policy from

the need to monetize government debt.


12/14

Sargent: Yes, this is a big breakdown ina line between fiscal and monetarypolicy intended to be set by theMaastricht Treaty in order to enforcethat artificial gold standard, as I viewthe euro to be. Once the monetary

authority starts assisting the fiscalauthorities of these countries, youvedrifted from the original conception ofthe euro.

Rolnick: Would you argue that Jack andNeils analysis comes back into playhere, the one about too-big-to-fail andmoral hazard?

Sargent: Unfortunately, yes, thats what Iwas trying to suggest.

Rolnick: Did things have to get to thispoint?

Sargent: Ultimately, thats a questionabout politics, about which I know toolittle. But in purely economic terms,

things could have gone differently.Heres a virtual history of what couldhave happened:

France and Germany stay holierthan thou from beginning to end, andalways respect the fiscal limits imposedby the Maastricht Treaty. They therebyacquire the moral authority to lead byexample, and the central core of euro-area countries are running budgets thatwithout doubt are balanced in a present- value sense. Therefore, the euro is

strong. The banks of the core coun(France and Germany again) are regulated (the message of KarekenWallace has been heard), so the banFrance and Germany are not holany dodgy bonds issued by gov

ments of dubious peripheral counthat have adopted the euro but thatwith violating the Maastricht Trrules.

In this virtual history, the ECB cplay tough and let the Greek governmdefault on its creditors by renegotiaterms of the debt. For the euro, lettinGreek bondholders suffer would actbe therapeutic; it would strengtheneuro by teaching peripheral counthat the ECB means business.

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More About omas J. Sargent

Current Positions

William R. Berkley Professor of Economics and Business,New York University, since 2002

Senior Fellow, Hoover Institution, Stanford University, since 1987

Research Associate, National Bureau of Economic Research, 197073and since 1979

Previous Positions

Donald Lucas Professor of Economics, Stanford University, 19982002

David Rockefeller Professor of Economics, University of Chicago, 199198Visiting Scholar, Hoover Institution, Stanford University, 198587

Visiting Professor of Economics, Harvard University, 198182

Ford Foundation Visiting Research Professor of Economics, University ofChicago, 197677

Adviser, Federal Reserve Bank of Minneapolis, 197187

Associate Professor of Economics, University of Minnesota, 197187;Professor from 1975

Associate Professor of Economics, University of Pennsylvania, 197071

First Lieutenant and Captain, U.S.Army; served as Staff Member andActing Director, Economics Division, Office of the Assistant Secretaryof Defense, 196869

Professional Affiliations

President, American Economic Association, 2007; President-elect, 2006;Vice President, 200001; Executive Committee, 198688

President, Econometric Society, 2005; First Vice President, 2004;Second Vice President, 2003; Council, 199599, 198792; Fellow, 1976

President, Society for Economic Dynamics and Control, 198992

Member, Brookings Panel on Economic Activity, 1973

Honors and Awards

Moore Distinguished Scholar, California Institut e of Technology, 200001

Marshall Lecturer, Cambridge, England, 1996

Erwin Plein Nemmers Prize in Economics, Northwestern University,199697

Fellow, American Academy of Arts and Sciences, 1983

Fellow, National Academy of Sciences, 1983

Mary Elizabeth Morgan Prize for Excellence in Economics,University of Chicago, 1979

Most Distinguished Scholar, University of California, Berkeley, Class of 196

Phi Beta Kappa, 1963

Publications

Author of a dozen books, including Robustness(with Lars Peter Hansen,

2008; Recursive Macroeconomic Theory(with Lars Ljungqvist),

2d ed., 2004; The Big Problem of Small Change(with Franois Velde),

2002; The Conquest of American Inflation, 1999; and Bounded Rationalit

in Macroeconomics, 1993. Author of more than 170 research papers

focusing on macroeconomic theory, time-series econometrics, learning

theory, fiscal and monetary policy, and economic history.

Education

Harvard University, Ph.D., 1968

University of California, Berkeley, B.A., 1964


13/14

Rolnick: Right. Although if that scenariohad been foreseen, Greece might nothave been able to issue that debt in thefirst place.

Sargent: Aha! The plot thickens. So then

we confront again the issue of how sep-arate can monetary and fiscal policy be?In the spirit of your observation,remember that there were huge capitalgains on Italian debt after it becameclear that it would be allowed to join theeuro area. So, what really was the reasonfor those capital gains? Were they basedon expectations of a reformed and moredisciplined fiscal policy in Italy? Or wasit rather an expectation that by joiningthe euro, Italy had gained access tobailouts from other euro-zone countries?

Note that a related point pertains tothe 2009 stress tests in the United States.What did it truly mean when a bankpassed the stress test? Did it mean thatthe banks balance sheet was solid? Ordid it mean that since the Fed said thatbank had passed the stress test, the Fedwould make sure that henceforth thatbank would have access to lender-of-last-resort facilities?

Its difficult to sort these things out.But notice that throughout our discus-sion, Art, weve been using the vocabu-lary of rational expectations. In our

dynamic and uncertain world, ourbeliefs about what other people andinstitutions will do play big roles inshaping our behavior.

Rolnick: Indeed. Thank you again, Tom.

Art RolnickJune 15, 2010

Endnotes

1 Hansen, Lars Peter, and Kenneth J.Singleton. 1983. Stochastic Consumption,Risk Aversion, and the Temporal Behaviorof Asset Returns. Journal of Political Economy

91(2), pp. 24965.2 Mehra, Rajnish, and Edward C. Prescott.1985. The Equity Premium: A Puzzle.Journal of Monetary Economics 15(2), pp.14561.

Weil, Philippe. 1989. The Equity PremiumPuzzle and the Risk-Free Rate Puzzle. Journalof Monetary Economics 24(3), pp. 40121.

Backus, David K., and Gregor W. Smith. 1993.Consumption and Real Exchange Rates inDynamic Economies with Non-TradedGoods. Journal of International Economics35(3/4), pp. 297316.

3 Stiglitz, Joseph E. 2009. Obamas Ersatz

Capitalism. New York Times, April 1.

Sachs, Jeffrey. 2009. Obamas Bank PlanCould Rob the Taxpayer. Financial Times,March 25.

4 Harrison, J. Michael, and David M. Kreps.1978. Speculative Investor Behavior in aStock Market with HeterogeneousExpectations. Quarterly Journal of Economics92(2), pp. 32336.

5 Scheinkman, Jos A., and Wei Xiong. 2003.Overconfidence and Speculative Bubbles.Journal of Political Economy 111(6),pp. 11831219.

6 New Keynesian economics refers to the

school of thought that has refined Keynesoriginal theories in response to the Lucascritique and rational expectations. Advocatesof New Keynesian theory rely on the idea thatprices and wages change slowly (referred toas sticky prices and wages) to explain whyunemployment persists and why monetarypolicy can influence economic activity. Buttheir models are adapted from the dynamicgeneral equilibrium models developed bynew classical economists such as Sargent andLucas. See http://www.econlib.org/library/Enc/NewKeynesianEconomics.html forelaboration.

7 Allen, Franklin, and Douglas Gale. 2007.

Understanding Financial Crises. Oxford andNew York: Oxford University Press.

8 Stern, Gary H., and Ron J. Feldman. 2004.Too Big to Fail: The Hazards of Bank Bailouts.Washington, D.C.: Brookings InstitutionPress.

9 Kareken, John H., and Neil Wallace. 1978.Deposit Insurance and Bank Regulation:

A Partial-Equilibrium Exposition. JournBusiness 51(July), pp. 41338. (Also athttp://minneapolisfed.org/research/sr/SR16.pdf.)

Bryant, John. 1980. A Model of ReservesBank Runs, and Deposit Insurance. Journof Banking& Finance 4(4), pp. 33544.

Diamond, Douglas W., and Philip H. Dyb1983. Bank Runs, Deposit Insurance, anLiquidity. Journal of Political Economy 91pp. 40119. (Also at http://minneapolisfeorg/research/QR/QR2412.pdf.)

10 Kareken, John H. 1983. Deposit InsurReform or Deregulation Is the Cart, Not Horse. Federal Reserve Bank of MinneapQuarterly Review 7 (Spring), pp. 19.

11 Weber, Warren E. 2010. Bank LiabilityInsurance Schemes Before 1865. ResearcDepartment Working Paper 679, FederalReserve Bank of Minneapolis. (See also AAntebellum Lesson in this issue ofThe

Region.)12 Chicago Tribune. 2009.The Stimulus RJan. 13. (Also in Brannon, Ike, and ChrisEdwards. 2009. The Troubling Return ofKeynesianism. Tax & Budget Bulletin 52,Institute, http://www.cato.org/pubs/tbb/tb_0109-52.pdf.)

13 Romer, Christina, and Jared Bernstein2009. The Job Impact of the AmericanRecovery and Reinvestment Plan,http://otrans.3cdn.net/ee40602f9a7d8172b8_ozm6bt5oi.pdf.

14 Cogan, John F., Tobias Cwik, John B. Tand Volker Wieland. 2009. New Keynesi

versus Old Keynesian Government SpendMultipliers. Working Paper 47, StanfordUniversity, http://www.hoover.org/news/report/15586; for a newer version of thispaper (Jan. 8, 2010), see http://www.stanfedu/~johntayl/CCTW_100108.pdf.

15 Christiano, Lawrence, Martin Eichenband Sergio Rebelo. 2009. When Is theGovernment Spending Multiplier Large?Working Paper, Northwestern Universityhttp://www.kellogg.northwestern.edu/facurebelo/htm/multiplier.pdf.

16 Gottschalk, Peter, and Robert Moffitt. The Growth of Earnings Instability in thU.S. Labor Market. Brookings Papers on

Economic Activity 2, pp. 21772.Meghir, Costas, and Luigi Pistaferri. 2004Income Variance Dynamics andHeterogeneity. Econometrica 72(1), pp. 1

17 Katz, Lawrence F., and David H. Autor1999. Changes in the Wage Structure anEarnings Inequality, in Handbook of LabEconomics, vol. 5. Oxford and New York:

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Elsevier Science, North-Holland, pp.14631555.

18 Ljungqvist, Lars, and Thomas J. Sargent.1998. The European UnemploymentDilemma. Journal of Political Economy106(3), pp. 51450.

Ljungqvist, Lars, and Thomas J. Sargent. 2008.Two Questions about EuropeanUnemployment. Econometrica 76(1), pp. 129.

19 Friedman, Thomas L. 2005. The World IsFlat: A Brief History of the Twenty-FirstCentury. New York: Farrar, Straus and Giroux.

20 Stigler, George J. 1962. Information in theLabor Market. Journal of Political Economy70(2), pp. 94105.

McCall, John J. 1970. Economics ofInformation and Job Search. QuarterlyJournal of Economics 84(1), pp. 11326.

21 Diamond, Peter A. 1982. WageDetermination and Efficiency in Search

Equilibrium. Review of Economic Studies49(2), pp. 21727.

Mortensen, Dale T. 1982. Property Rightsand Efficiency in Mating, Racing, and RelatedGames. American Economic Review 72(5),pp. 96879.

Pissarides, Christopher A. 1992. Loss ofSkill During Unemployment and thePersistence of Employment Shocks. QuarterlyJournal of Economics 107(4), pp. 137191.

Mortensen, Dale T., and Christopher A.Pissarides. 1999. Unemployment Responsesto Skill-Biased Technology Shocks: The Roleof Labor Market Policy. Economic Journal

109(455), pp. 24265.22 Ljungqvist, Lars, and Thomas J. Sargent.2003. European Unemployment: From aWorkers Perspective, in Knowledge,Information, and Expectations in ModernMacroeconomics: In Honor of Edmund S.Phelps. Philippe Aghion, Roman Frydman,Joseph Stiglitz and Michael Woodford, eds.Princeton, N.J.: Princeton University Press,pp. 32650.

23 Sargent, Thomas J. 2010. Where to DrawLines: Stability versus Efficiency,http://homepages.nyu.edu/~ts43/research/phillips_ver_9.pdf. (See also http://www.minneapolisfed.org/research/events/2010

_04-23/index.cfm.)

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