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interest rate. The period utility function is logarithmic. The proof is constructive, and shows how the model can be solved …
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liquidity effect on the participants' consumption and marginal utility, on the stochastic discount factor, and on real returns …
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Following a contractionary monetary policy shock, the aggregate output decreases over time for six to eight quarters, while the real interest rate increases immediately and remains high for three quarters. Full participation models can hardly replicate the joint response of the aggregate output...
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