The fiscal theory states that inflation adjusts so that the real value of government debt equals the present value of real primary surpluses. Monetary policy remains important. The central bank can set an interest rate target, which determines the path of expected inflation, while news about the...

We show that if the central bank operates without commitment and faces constraints on its balance sheet, helicopter drops can be a useful stabilization tool during a liquidity trap. With commitment, even with balance sheet constraints, helicopter drops are irrelevant

This paper studies the implications of central bank credibility for long-run inflation and inflation dynamics. We introduce central bank lack of commitment into a standard non-linear New Keynesian economy with sticky-price monopolistically competitive firms. Inflation is driven by the...

In a rich family of linearized structural macroeconomic models, the counterfactual evolution of the macro-economy under alternative policy rules is pinned down by just two objects: first, reduced-form projections with respect to a large information set; and second, the dynamic causal effects of...

Monetary policy transmits through broad financial conditions--interest rates, asset prices, credit spreads and exchange rates--rather than through the policy rate alone. Yet current frameworks remain anchored around r*, the neutral interest rate. We introduce FCI*, the neutral level of financial...

This paper develops a welfare accounting decomposition that identifies and quantifies the ultimate origins of welfare gains and losses in general economies with heterogeneous individuals and disaggregated production. The decomposition---exclusively based on preferences and technologies---first...

This study provides evidence on the usage and preferences of Federal Reserve's Federal Open Market Committee (FOMC) regarding the balance between rules and discretion in policy decisions. Analyzing FOMC transcripts over 40 years, we find that while Discretion has been a consistent feature in the...

We show that, in a general family of linearized structural macroeconomic models, knowledge of the empirically estimable causal effects of contemporaneous and news shocks to the prevailing policy rule is sufficient to construct counterfactuals under alternative policy rules. If the researcher is...

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...

This paper develops a new approach to make welfare assessments based on the notion of Dynamic Stochastic weights (DS-weights for short). For a large class of dynamic stochastic economies with heterogeneous individuals, we introduce an aggregate additive decomposition that satisfies desirable...