The major central banks now operate in a regime of abundance of bank reserves. As a result, they can only raise the money market rate by increasing the rate of remuneration of bank reserves. This, in turn, leads to large transfers of the central banks' profits (and more) to commercial banks that...

We analyze the similarities and the differences in the fragility of the European Monetary system (EMS) and the Eurozone. We test the hypothesis that in the EMS the fragility arose from the absence of a credible lender of last resort in the foreign exchange markets while in the Eurozone it was...

It is well-known that the high synchronization of the business cycles among industrial countries cannot easily be replicated in standard open economy macroeconomic models without assuming that the exogenous shocks hitting these countries are highly correlated. We develop a two-country behavioral...

We use a behavioral macroeconomic model to analyze how structural reforms affect the economy in the short and in the long run. We consider two types of structural reforms. The first one increases the flexibility of wages and prices; the second one raises potential output in the economy. We find...

In a world of radical uncertainty the frequency distributions of economic variables deviate from the normal distribution and typically exhibit fat tails. We show that this feature is obtained in simple models where agents have cognitive limitations and fail to understand the underlying model....

This paper introduces agent heterogeneity, liquidity, and endogenous default to a DSGE framework. Our model allows for a comprehensive assessment of regulatory and monetary policy, as well as welfare analysis in the different sectors of the economy. Due to liquidity and endogenous default, the...

We analyse the use of current and forward-looking data in the setting of monetary policy (Taylor rule). We answer the question of whether the use of forward-looking data is to be preferred over the use of current data. We use a behavioural macroeconomic model that generates periods of...