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

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...

We empirically characterize episodes of large inflation surges that have been observed worldwide in the last three decades. We document four facts. (1) Inflation following surges tends to be persistent, with the duration of disinflation exceeding that of the initial inflation increase. (2)...

The paper extends previous analysis of closed-economy inflation targeting to a small open economy with forward-looking aggregate supply and demand with some microfoundations, and with stylized realistic lags in the different transmission channels for monetary policy. The paper compares targeting...

This paper explores several issues concerning a possible zero lower bound (ZLB) including its theoretical rationale; the magnitude of effects of low sustained inflation on real interest rates; the validity of analyzing monetary policy in models with no monetary variables; and the dynamic...

This paper reviews the recent literature on monetary policy rules. We exploit the monetary policy design problem within a simple baseline theoretical framework. We then consider the implications of adding various real world complications. Among other things, we show that the optimal policy...

We use the limited participation model of money as a laboratory for studying the operating characteristics of Taylor rules for setting the rate of interest. Rules are evaluated according to their ability to protect the economy from bad outcomes such as the burst of inflation observed in the...

In the late 1970s countries in Latin America's Southern Cone attempted to lower domestic inflation rates through the progressive reduction of a preannounced rate of exchange-rate devaluation. The stabilization programs gave rise to massive capital inflows, real exchange-rate appreciation, and...

Estimates of the cost of disinflation made before the recent reduction in the inflation rate varied widely. Estimates were made in terms of the sacrifice ratio -- the percentage points of GNP at an annual rate lost per percentage point reduction in the inflation rate. At one extreme it was...