The crisis in the Euro area has partly been blamed on the inability of individual countries to devalue their currencies. In this paper we evaluate the extent to which fiscal instruments can be used to replicate the behavior of an exchange rate devaluation in a New Keynesian Open Economy...

This paper analyzes the possibility and the consequences of rational bubbles in a dynamic economy where financially constrained firms demand and supply liquidity. Bubbles are more likely to emerge, the scarcer the supply of outside liquidity and the more limited the pledgeability of corporate...