Robert J. Barro

However much theoretical and empirical work Robert J. Barro has done, it is nothing compared with the amount of work he has forced others to undertake in an effort to address his insights. The career of this renowned Harvard New Classical macroeconomist has evolved through several distinct stages. Nonetheless, at each stage, Barro has made groundbreaking – and controversial – contributions which have reshaped much of macroeconomics since the 1970s.

Early in his career, Robert Barro was a leading figure in Walrasian-Keynesian disequilibrium macroeconomics in the tradition of Clower and Leijonhufvud – producing, with Herschel Grossman, perhaps the two most definitive pieces in this tradition – complete macromodels with goods market and labor market rationing equilibria (1971, 1976).

Almost immediately, Barro turned on his Keynesian roots and joined the Rational Expectations revolution with two central pieces: his celebrated ‘Ricardian Equivalence Hypothesis’ (1974) and his famous money neutrality paper (1976). Under a particular set of assumptions (e.g. intergenerational altruism or immortality, perfect capital markets, lump sum taxation, and the condition that debt not grow faster than the economy), Barro’s (1974) ‘Ricardian Equivalence Hypothesis’ argues that every bond-financed deficit must be met by a future tax increase, that this tax increase would be forseen by living agents and that these agents would care enough about posterity to adjust their present consumption accordingly. In short, this implies that agents do not take a bond-financed fiscal expansion as a lucky windfall but rather will save the entire proceeds in anticipation of the future tax burden – and thus not raise their demand for goods and services. Thus income received by agents from government deficit-spending is all saved – and hence has no effect on consumption (thus no multiplier) – and that these savings go into the demand for the very same bonds that were supplied to finance that government spending (so bond demand rises exactly to meet higher bond supply, and money demand is unchanged) and thus there is no effect on interest rates either.

Barro’s ‘Ricardian Equivalence Hypothesis’ has spawned a virtual research industry of its own as a whole generation of economists have climbed over each other tortuously examining, assailing, and verifying the validity and implications of Barro’s theorem (his 1974 paper is among the most-referenced papers in economics today). Barro’s 1976 paper on the neutrality of monetary policy (i.e. that changing money supply growth would not affect output or interest or any real variables) followed up on the work of Robert Lucas and Sargent and although less unique, it was no less controversial.

Barro nonetheless proceeded on to develop new theories of fiscal policy which respected Ricardian Equivalence (1979, 1980, 1981). His work on ‘optimal taxation’ and the impact of permanent/temporary government spending on time paths of output, consumption and interest rates have also been followed up intently by other economists. Barro’s essential approach was that, while accepting that the size of a deficit would not matter, fiscal policy can still have an effect on the income and consumption profiles of people over time and thus, one can and should carefully examine particular expenditure and tax schemes for differing welfare implications.

Together with D. Gordon, Robert Barro (1983) cracked open another new flood of research in his analysis of inflation as a ‘dynamic inconsistency’ problem: the idea that inflation results from a game played between the government (more specifically, the central bank) and the general public. The argument essentially is that Central Banks are often (rationally) tempted to violate their own announced inflation targets in order to reduce unemployment; as a result, the public will generally deduce that inflation targets will not be met and thus raise their inflation expectations accordingly – which will itself increase inflation and make the announced inflation target inoperable from the start. The public policy implication of this idea is that, in order to control inflation, Central Banks should be bound by externally-imposed rules or run by conservative, reputation-careful chairmen in order to build public confidence in announced inflation targets and avoid the temptation to violate them. Such ‘rules’ have been experimentally inserted into the charters of central banks in several countries (e.g. New Zealand) as a result of Barro’s observations.

Never one to shy away from empirical work, Barro has lent his hand to numerous massive and authoritative empirical studies on several macroeconomic issues such as monetary policy, fiscal policy, growth, etc. (e.g. 1978, 1979, 1986, 1987, 1990, 1995). He has accompanied the development of New Classical economics into the fields of Real Business Cycle Theory and the neo-classical theory of economic growth. His most recent empirical and theoretical efforts have been in attempting to determine the sources of growth – i.e. the factors that make particular countries grow faster than others rather than converge to a common growth rate (1991, 1992, 1993, 1995).

Major Works of Robert J. Barro

– Inflation, the Payments Period and the Demand for Money, 1970, JPE
– A General Disequilibrium Model of Income and Employment, with H.I.Grossman, 1971, AER
– Inflationary Finance and the Welfare Cost of Inflation, 1972, JPE
– A Theory of Monopolisitc Price Adjustment, 1972, RES
– Suppressed Inflation and the Supply Multiplier, with H.I. Grossman, 1974, RES
– Are Government Bonds Net Wealth?, 1974, JPE
– Reply to Buchanan and Wagner, 1976, JPE
– Money, Employment and Inflation, with H.I. Grossman, 1976
– Recent Developments in Monetary Theory, with S. Fischer, 1976, JME
– Rational Expectations and the Role of Monetary Policy, 1976, JME
– Recent Developments in Monetary Theory”, with S. Fischer, 1976, JME
– Long-Term Contracting, Sticky Prices and Monetary Policy, 1977, JME
– Unanticipated Money Growth and Unemployment in the United States, 1977, AER
– Unanticipated Money, Output, and the Price Level in the United States, 1978, JPE
– Comment from an Unreconstructed Ricardian, 1978, JME
– Impact of Social Security on Private Saving: Evidence from the U.S. time series, 1978
– Social Security and Consumer Spending in an International Cross-Section, with G.M. MacDonald, 1979, J Public Econ
– Money and the Price Level under the Gold Standard, 1979, EJ
– On the Determination of the Public Debt, 1979, JPE
– Federal Deficit Policy and the Effects of Public Debt Shocks, 1980, JMCB
– A Capital Market in an Equilibrium Business Cycle Model, 1980, Econometrica
– Unanticipated Money and Economic Activity, with M. Rush, 1980, in Fischer, editor, Rational Expectations
– Money Stock Revisions and Unanticipated Money Growth, with Z. Hercowitz, 1980, JME
– Money, Expectations and Business Cycles, 1981
– Output Effects of Government Purchases, 1981, JPE
– Rules, Discretion and Reputation in a Model of Monetary Policy, with D.B. Gordon, 1983, JME
– A Positive Theory of Monetary Policy in a Natural Rate Model, with D.B. Gordon, 1983, JPE
– Inflationary Finance under Discretion and Rules, 1983, Canadian JE
– Time-Separable Preferences and Intertemporal Substitution Models of Business Cycles, with R.G. King, 1984, QJE
– Macroeconomics, 1984
– Reputation in a Model of Monetary Policy with Incomplete Information, 1986, JME
– Recent Developments in the Theory of Rules versus Discretion, 1986, EJ
– U.S. Deficits since World War I, 1986, Scandanavian JE
– Average Marginal Tax Rates from Social Security and the Individual Income Tax, with C. Sahasakul, 1986, J of Business
– Government Spending, Interest Rates, Prices and Budget Deficits in the United Kingdom, 1701-1918, 1987, JME
– A Reformulation of the Economic theory of Fertility, with G.S. Becker, 1988, QJE
– The Neoclassical Approach to Fiscal Policy, 1989, in Barro, editor, Modern Business Cycle Theory
– The Ricardian Approach to Budget Deficits, 1989, JEP
– Interest Rate Targeting, 1989, JME
– The Stock Market and Investment, 1990, Review of Financial Studies
– World Real Interest Rates, with X. Sala-i-Martin, 1990, NBER Macroeconomics Annual
– Government Spending in a Simple Model of Endogenous Growth, 1990, JPE
– Economic Growth in a Cross-Section of Countries, 1991, QJE
– A Cross Country Study of Growth, Saving and Government, 1991, in Bernheim and Shoven, editors, National Saving and Econ Performance
– Convergence Across States and Regions, with X. Sala-i- Martin, 1991, BPEA
– Convergence, with X. Sala-i-Martin, 1992, JPE
– Regional Growth and Migration, with X. Sala-i-Martin, 1992, J of Japanese and International Econ
– Public Finance in Models of Economic Growth, with X. Sala-i- Martin, 1992, RES
– International Comparisons of Educational Attainment, with J.W. Lee, 1993, JME
– Sources of Economic Growth”, with J.W. Lee, 1994, JME
– The Aggregate-Supply/Aggregate-Demand Model, 1994, Eastern EJ
– Economic Growth with X. Sala-i-Martin, 1995

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