We estimate a forward looking New Keynesian Phillips Curve (NKPC) for the U.S. using data from the Survey of Professional Forecasters as proxy for expected inflation. We find that the NKPC captures inflation dynamics well, independent from whether output or unit labor costs are used as a measure...

This paper introduces directed search into the sequential search model of Diamond (1971) by allowing buyers to observe the distribution of prices charged by two (or more) distinct subgroups of firms in the market. This enables buyers to direct their searches towards the most desirable group of...

This paper considers a linear-quadratic control problem and determines how optimal policy is affected when the private sector has finite (Shannon) capacity to process information. Such capacity constraints prevent private agents from perfectly observing the state variables and the policy...

We study interactions between monetary policy, which sets nominal interest rates, and fiscal policy, which levies distortionary income taxes to finance public goods, in a standard, sticky-price economy with monopolistic competition. Policymakers' inability to commit in advance to future policies...

This paper compares Bayesian decision theory with robust decision theory where the decision maker optimizes with respect to the worst state realization. For a class of robust decision problems there exists a sequence of Bayesian decision problems whose solution converges towards the robust...

PricesThis paper studies the properties of adaptive learning as a device to select amongst the rational expectations equilibria of a monetary overlapping generations model. It extends previous contributions by introducing monopolistic competition and improves upon them by analyzing learning in a...

We present a decision theoretic framework with agents that are learning about the behavior of market determined variables. Agents are 'internally rational', i.e., maximize discounted expected utility under uncertainty given consistent beliefs about the future, but may not be 'externally...

How do different levels of government debt affect the optimal conduct of monetary and fiscal policies? And what do these optimal policies imply for the evolution of government debt over time? To provide an answer, this paper studies a standard monetary policy model with nominal rigidities and...

We consider optimal monetary stabilization policy in a New Keynesian model with explicit microfoundations, when the central bank recognizes that private-sector expectations need not be precisely model-consistent, and wishes to choose a policy that will be as good as possible in the case of any...

The booms and busts in U.S. stock prices over the post-war period can to a large extent be explained by fluctuations in investors` subjective capital gains expectations. Survey measures of these expectations display excessive optimism at market peaks and excessive pessimism at market throughs....