On June 6, 2011, he withdrew his nomination to serve on the Federal Reserve's board of governors, citing intractable Republican opposition for 14 months.

[14] He earned a bachelor's degree summa cum laude in mathematics from Yale University (1960), and a Ph.D. at the Massachusetts Institute of Technology (1963).

In April 2010, Diamond, along with Janet Yellen and Sarah Bloom Raskin, was nominated by President Barack Obama to fill the vacancies on the Federal Reserve Board.

[22] In June 2011, following a third round of consideration for the Fed seat, Diamond wrote in a New York Times op-ed column that he planned to withdraw his name.

In the column, he strongly criticized the nomination process and "partisan polarization" in Washington, saying he was effectively blocked by Republicans on the Senate Banking Committee.

But [Diamond began his reply, in the column] understanding the labor market—and the process by which workers and jobs come together and separate—is critical to devising an effective monetary policy.

Diamond went on to discuss how his expertise would, he felt, have benefited the central bank and his opinion that "[s]killed analytical thinking should not be drowned out by mistaken, ideologically driven views.

"[23] In a statement, Shelby "wouldn't be drawn into a public spat with the nominee," saying simply "I have said many times that I commend Dr. Diamond's talent and career.

[27] Andrei Shleifer and Emmanuel Saez are two of his doctoral supervisees who won the John Bates Clark Medal for the best American economist under the age of 40.

In particular, depending on the preferences and technology, the economy might find itself saving too much, pushing the capital stock above what Edmund Phelps called the Golden Rule level.

It is characterised by 7 assumptions: i) perfect competition ii) constant returns to scale to production iii) lump sum taxation is not possible iv) there is a revenue requirement i.e. the government has to raise revenue to fund its expenditures v) full instrument set: the government has the flexibility to levy taxes on all commodities and all factors of production in the economy vi) non-satiation in at least one good vii) individualistic social welfare function.

Diamond (1982) is one of the first papers which explicitly models the search process involved in making trades and hiring workers, which results in equilibrium unemployment.