We develop a dynamic stochastic general equilibrium model to study bank risk and sovereign risk interdependence in the Euro Area. We find that an increase in capital investment risk shock, results in a considerably deeper recession when sovereign risk is also present. This result has three...

We examine global dynamics under learning in New Keynesian models with price level targeting that is subject to the zero lower bound. The role of forward guidance is analyzed under transparency about the policy rule. Properties of transparent and non-transparent regimes are compared to each...

The interaction between a common monetary policy targeting inflation and decentralized fiscal policies aiming at output stability is considered in a setting taking into account interdependencies between countries running via trade links and the common monetary policy. The setting is sufficiently...

We consider inflation and government debt dynamics when monetary policy employs a global interest rate rule and private agents forecast using adaptive learning. Because of the zero lower bound on interest rates, active interest rate rules are known to imply the existence of a second, low...

It is widely argued that Europe's unified monetary policy calls for international coordination at the fiscal level. We survey the issues involved with such coordination of fiscal policy as a demand management tool and we use a simple model to investigate the circumstances under which...

This paper explores the unfinished business of preparing for an harmonious monetary union, "more perfect" than the coarse model set up in the Maastricht and Amsterdam Treaties. To start with, the ECB may fear that it has to live up to its stated lexicographic mission for fear of losing...

We examine global economic dynamics under infinite-horizon learning in a New Keynesian model in which the interest-rate rule is subject to the zero lower bound. As in Evans, Guse and Honkapohja (2008), we find that under normal monetary and fiscal policy the intended steady state is locally but...

We examine global economic dynamics under learning in a New Keynesian model in which the interest-rate rule is subject to the zero lower bound. Under normal monetary and fiscal policy, the intended steady state is locally but not globally stable. Large pessimistic shocks to expectations can lead...

In this Paper, we analyse the implications of price setting restrictions for the conduct of cyclical fiscal and monetary policy. We consider an environment with monopolistic competitive firms, a shopping time technology, prices set one period in advance, and government expenditures that must be...

Despite convergence pressures, differences in housing and financial market institutions across the 15 member states of the European Union are still enormous. This paper argues that they have profound effects on the responsiveness of output and inflation in the different countries to changes in...