What is the basic economic decision-making unit? Is it the household or the extended family? This question is fundamental to economic analysis and policy design. The answer given by the Life Cycle and Keynesian models is that the economic unit is the household. According to these models, members...

This paper examines the bequest\gift behavior of altruistic parents who do not know their children's abilities and cannot observe their children's work effort. Parents are likely to respond to this information problem by making larger bequests to higher earning children and by using their...

This article demonstrates that Ricardian Equivalence does not necessarily hold in models with altruistic transfers once one takes into account the strategic behavior of recipients as well as donors. To influence the final allocation of consumption in altruistic settings, potential recipients can...

In recent years Robert Barro's (1974) ingenious model of inter- generational altruism has taken its place among the major theories of consumption and saving. Despite its policy importance, there have been few direct tests of the Barro model. This paper presents a new direct test that is based on...

This paper is an attempt to enrich the characterization of the sluggish behavior of the aggregate price level. Our contribution to this vast literature is to explicitly consider microeconomic heterogeneity and its interaction with nonlinear microeconomic price adjustment policies. The model we...

We present evidence that noisy financial flows influence financial conditions and macroeconomic activity. How should monetary policy respond to this noise? We develop a model where it is optimal for the central bank to target and (partially) stabilize financial conditions beyond their direct...

One of the most serious problems that a central bank in an emerging market economy can face, is the sudden reversal of capital inflows. Hoarding international reserves can be used to smooth the impact of such reversals, but these reserves are seldom sufficient and always expensive to hold. In...

Most economists and observers place the lack of fiscal discipline at the core of the recent Argentine crisis. This begs the question of how countries like Belgium or Italy (pre-Maastricht) could run large fiscal deficits and accumulate debts far beyond those of Argentina, without experiencing...

The estimated persistence of macro aggregates involving lumpy microeconomic adjustment is biased downward when inferred from VAR estimates. The extent of this "missing persistence bias" decreases with the level of aggregation, yet convergence is very slow. Paradoxically, while idiosyncratic...

Emerging economies experience sudden stops in capital inflows. As we have argued in Caballero and Krishnamurthy (2002), having access to monetary policy during these sudden stops is useful, but mostly for insurance' rather than for aggregate demand reasons. In this environment, a central bank...