Since the 2008 global financial crisis, and after decades of relative neglect, the importance of the financial system and its episodic crises as drivers of macroeconomic outcomes has attracted fresh scrutiny from academics, policy makers, and practitioners. Theoretical advances are following a...

We derive principles of optimal short run monetary policy in a real business cycles model, with money and with monopolistic firms that set prices one period in advance. The only distortionary policy intruments are the nominal interest rates and the money supplies. In this environment it is...

We determine the optimal combination of taxes on money, consumption and income in transactions technology models where exogenous government expenditures must be financed with distortionary taxes. We show that the optimal policy does not tax money, regardless of whether the government can use as...

In contrast to the recent literature on the optimal inflation tax, we show that, in models where money reduces transactions costs, it is optimal to set the inflation tax to zero when seigniorage is replaced by revenue from distortionary taxes. The main reasons for this result are that the...

This paper compares the behavior of Euro-Area (EA) banks’ credit and reserves with those of US banks following respective major crisis triggers (Lehman’s collapse in the US and the 2009 admission by Papandreou, that Greece’s deficit was substantially higher than previously believed, in the...

The crisis of the advanced economies in 2008-09 has focused new attention on money and credit fluctuations, financial crises, and policy responses. We study the behavior of money, credit, and macroeconomic indicators over the long run based on a new historical dataset for 14 countries over the...

The paper considers ways of avoiding a liquidity trap and ways of getting out of one. Unless lower short nominal interest rates are associated with significantly lower interest volatility, a lower average rate of inflation, which will be associated with lower expected nominal interest rates,...

This Paper explores the quantitative implications of an approach to monetary policy that gained prominence in the United States during the 1990s. Proponents of this approach recommend that, when inflation is moderate but still above the long-run objective, the central bank should not move...

The first part of the paper analyzes the inflationary risks associated with price liberalization, the welfare costs of inflation and the difficulties of East European central banks in pursuing non-inflationary policies. The main obstacles are the low credibility of stabilization policies and a...

In deciding a monetary policy stance, central bankers need to evaluate carefully the risks the current economic situation poses to price stability. We propose to regard the central banker as a risk manager who aims to contain inflation within pre-specified bounds. We develop formal tools of risk...