This paper explores the macroeconomic consequences of preferences displaying asubsistence point. It departs from the existing related literature by assuming thatsubsistence points are specific to each variety of goods rather than to the compositeconsumption good. We show that this simple feature...

This paper computes welfare-maximizing monetary and fiscal policy rules in a real business cycle model augmented with sticky prices, a demand for money, taxation, and stochastic government consumption. We consider simple feedback rules whereby the nominal interest rate is set as a function of...

This paper characterizes jointly optimal default and exchange-rate policy in a small open economy with limited enforcement of debt contracts and downward nominal wage rigidity. Under optimal policy, default occurs during contractions and is accompanied by large devaluations. The latter inflate...