This paper provides empirical evidence on the effectiveness of movements in nominal exchange rates in smoothing cyclical imbalances between countries, as explained by the literature on optimal currency areas. We use restrictions from the Mundell-Flemming model (on which the theory of optimal...

The purpose of the present Paper is twofold. First, we characterize the Fed’s systematic response to technology shocks and its implications for US output, hours and inflation. Second we evaluate the extent to which those responses can be accounted for by a simple monetary policy rule...

Recent evidence suggests that consumption rises in response to an increase in government spending. That finding cannot be easily reconciled with existing optimizing business cycle models. We extend the standard new Keynesian model to allow for the presence of rule-of-thumb consumers. We show how...

This paper is an attempt to provide an updated assessment of what we know and what do not know about the impact of monetary policy on the economy and what implications follow for the conduct of monetary policy in today's world. Firstly, we discuss the conditions under which monetary policy can...

We introduce rule-of-thumb consumers in an otherwise standard dynamic sticky price model, and show how their presence can change dramatically the properties of widely used interest rate rules. In particular, the existence of a unique equilibrium is no longer guaranteed by an interest rate rule...

In this Paper, we present a dynamic optimizing model that allows explicitly for imperfect substitutability between different financial assets. This is specified in a manner that captures Tobin’s (1969) view that an expansion of one asset’s supply affects both the yield on that asset and the...

This Paper presents an analysis of how alternative models of the business cycle can replicate the stylized fact that large governments are associated with less volatile economies. Our analysis shows that adding nominal rigidities and costs of capital adjustment to an otherwise standard RBC model...

In this Paper, we look at the role of money in a general framework that encompasses three competing environments: the New Keynesian model with separable utility and static money demand; the non-separable utility variant with habit formation; and the New Keynesian model modified to allow for...

We examine the role of money in three environments: the New Keynesian model with separable utility and static money demand; a nonseparable utility variant with habit formation; and a version with adjustment costs for holding real balances. The last two variants imply forward-looking behaviour of...