Volume 6 Franco Modigliani

THE COLLECTED PAPERS OF

FRANCO MODIGLIANI
VOLUME 6 FRANCO MODIGLIANI

The Collected Papers of Franco Modigliani

Franco Modigliani in 1992.

Volume 6

The Collected Papers of Franco Modigliani

Franco Modigliani

The MIT Press
Cambridge, Massachusetts, London, England

© 2005 Massachusetts Institute of Technology All rights reserved. No part of this book may be reproducedin any form by any electronic or mechanical means (including photocopying, recording, or information storage and retrieval) without permission in writing from the publisher. MIT Press books may be purchased at special quantity discounts for business or sales promotional use. For information, please email special_sales@mitpress.mit.edu or write to Special Sales Department, The MIT Press, 55 HaywardStreet, Cambridge, MA 02142. This book was set in Futura and Times Roman by SNP Best-set Typesetter Ltd., Hong Kong and was printed and bound in the United States of America. Library of Congress Cataloging-in-Publication Data (Revised for vol. 6) Modigliani, Franco. The collected papers of Franco Modigliani. Vol. 6 edited by Francesco Franco Includes bibliographical references and indexes.Contents: v. 1. Essays in macroeconomics.—[etc.]— v. 4. Monetary theory and stabilization policies.— v. 5. Saving, deficits, inflation, and financial theory. 1. Economics. I. Abel, Andrew B., 1952–. II. Johnson, Simon. III. Title. HB171.M557 330 78-21041 ISBN 0-262-13150-1 (v.1)

In Stockholm in 1985, receiving the Nobel Prize from King Gustav Adolph of Sweden.

CONTENTS

Preface Francesco FrancoIntroduction I 1 THE LIFE-CYCLE HYPOTHESIS Utility Analysis and the Consumption Function: An Interpretation of Cross-Section Data (with Richard Brumberg) The “Life-Cycle” Hypothesis of Saving: Aggregate Implications and Tests (with Albert Ando) Long-Run Implications of Alternative Fiscal Policies and the Burden of the National Debt Recent Declines in the Savings Rate: A Life Cycle Perspective TheAge Saving Profile and the Life-Cycle Hypothesis (with Tullio Jappelli) The Chinese Saving Puzzle and the Life-Cycle Hypothesis (with Shi Larry Cao) UNEMPLOYMENT AND MONETARY POLICY IN THE EUROPEAN UNION DURING THE 1990s An Economists’ Manifesto on Unemployment in the European Union (with Jean Paul Fitoussi, Beniamino Moro, Dennis Snower, Robert Solow, Alfred Steinherr, and Paolo Sylos Labini)

ixxi 1

3

2

47 79 107 141

3 4 5 6

173

II

207

7

209

viii

Contents

8 9

The Shameful Rate of Unemployment in the EMS: Causes and Cures Why the EMS Deserves an Early Burial (with Olivier Blanchard, Rudiger Dornbusch, Stanley Fischer, Paul Samuelson, and Robert Solow) No Reason to Mourn (with Olivier Blanchard, Rudiger Dornbusch, Stanley Fischer, Paul Krugman, PaulSamuelson, and Robert Solow) MISCELLANA: INFLATION, RISK, LEGAL INSTITUTIONS, AND UNEMPLOYMENT Long-term Financing in an Inflationary Environment Risk-Adjusted Performance: How to Measure It and Why (with Leah Modigliani) The Rules of the Game and the Development of Security Markets (with Enrico Perotti) Emerging Issues in the World Economy The Keynesian Gospel According to Modigliani INTERVIEW AnInterview with Franco Modigliani (Interviewed by William A. Barnett and Robert Solow) Index

239

275

10

277

III

281 283

11 12

289

13

305 319 327 361

14 15 IV 16

363 385

PREFACE

The essays collected in this volume represent the last decade of Franco Modigliani’s scientific contribution to economics. This volume has been on the drawing board for many years,but Modigliani kept postponing it on the grounds that there were one or more nearly finished papers whose inclusion in the collection seemed essential to him. He completed the last paper, “The Chinese Saving Puzzle and the Life-Cycle Hypothesis” on September 24, 2003. On September 25, he did not wake up. A couple of years ago, Franco Modigliani asked me to edit the collection. I thought the job...