Financial integration generates macroeconomic spillovers that may require international monetary policy coordination. We show that individual central banks may set nominal interest rates too low or too high relative to the cooperative outcome. We identify three sufficient statistics that...

We introduce "smooth diagnosticity." Under smooth diagnosticity, agents over-react to new information defined as the difference between the current information set and a previous information set. Since new information typically changes not just the conditional mean, but also the conditional...

Most governments are mandated to maintain their economies at full employment. We propose that the best marker of full employment is the efficient unemployment rate, u*. We define u* as the unemployment rate that minimizes the nonproductive use of labor--both jobseeking and recruiting. The...