The Great Recession and current pandemic have focused attention on the constraint on nominal interest rates from the effective lower bound.
Standard theories of price adjustment are based on the problem of a single-product firm, and therefore they may not be well suited to analyze price dynamics in the economy with multiproduct firms.
We analyze money financing of fiscal transfers (helicopter money) in two simple New Keynesian models: a “textbook” model in which all money is non-interest-bearing (e.g., all money is currency), and a more realistic model with interest-bearing reserves.
Models for macroeconomic forecasts do not usually take into account the risk of a crisis—that is, a sudden large decline in gross domestic product (GDP). However, policy-makers worry about such GDP tail risk because of its large social and economic costs.
This research develops a model in which the economy is directly influenced by how pessimistic or optimistic economic agents are about the future. The agents may hold different views and update them as new economic data become available.
I show that maturity considerations affect the optimal conduct of monetary and fiscal policy during a period of government debt reduction. I consider a New Keynesian model and study a dynamic game of monetary and fiscal policy authorities without commitment, characterizing the incentives that drive the choice of interest rate.
Financial frictions affect how much consumers spend on durable and non-durable goods. Borrowers can face both loan-to-value (LTV) constraints and payment-to-income (PTI) constraints.
Most models in finance assume that agents make trading plans over the infinite future. We consider instead that they are boundedly rational and may only form forecasts over a limited horizon.
The adoption of inflation targeting (IT) by central banks leads to an increase of 10 to 20 percent in measures of financial development, with a lag. We also find evidence that the financial sector benefits of IT adoption were higher for early-adopting central banks.