This paper revisits the size of the fiscal multiplier. The experiment is a fiscal expansion under the assumption of a pegged nominal rate of interest in linearised sticky price model. We demonstrate that a quantitatively important issue is the articulation of the exit from the policy experiment....

We show that interest rate rules that feed back on the growth rates of target variables (such as output or asset prices) may induce recessions in the presence of a zero lower bound, through purely self-fulfilling dynamics. This pathology is illustrated in a small New Keynesian model with...

Recent monetary policy experience suggests a simple test for models of monetary non-neutrality. Suppose the central bank pegs the nominal interest rate below steady state for a reasonably short period of time. Familiar intuition suggests that this should be inflationary. We pursue this simple...

In this paper, we consider how monetary policy in a large, foreign economy affects optimal monetary policy in a small open economy (‘home’) in response to a large global demand shock that pushes both economies to the zero lower bound (ZLB) on nominal interest rates. We show that the...

The aim of this paper is to investigate theoretically how financial factors affect the international transmission mechanism. We build a two-country dynamic stochastic general equilibrium model with sticky prices and financial frictions. To add to the literature we extend the model to include two...

This paper develops a DSGE model in which banks use short-term deposits to provide firms with long-term credit. The demand for long-term credit arises because firms borrow in order to finance their capital stock which they only adjust at infrequent intervals. We show within a real business cycle...

This paper proposes an empirical model which can be used to estimate the impact of changes in the volatility of shocks to US real activity on the UK economy. The proposed empirical model is a structural VAR where the volatility of structural shocks is time varying and is allowed to affect the...

The identification of reduced-form VAR model had been the subject of numerous debates in the literature. Different sets of identifying assumptions can lead to very different conclusions in the policy debate. This paper proposes a theoretically consistent identification strategy using...