This paper examines the role of the monetary instrument choice for local equilibrium determinacy under sticky prices and different fiscal policy regimes. Corresponding to Benhabib et al.'s (2001) results for interest rate feedback rules, the money growth rate should not rise by more than one for...

Conventional wisdom teaches that the output response upon a fiscal expansion is higher under fixed than floating exchange rates for a small open economy. We analyse the effects of fiscal expansions using a New Keynesian model and find that this result reverses in times of sovereign default risk....

In this paper we argue that authorities aid cooperation by means ofdirect coordination or the enforcement of re-commitment devices suchas contract laws.Credible threats of violence allow this role. In alocal interaction model, an authority forms if mutually connected individuals with sufficient...

We analyze optimal monetary policy in a sticky pricemodel where the central bank supplies money outrightvia asset purchases and lends money temporarily againstcollateral. The terms of central bank lending affect ra-tioning of money and impact on macroeconomic aggre-gates. The central bank can...

Price-level targeting (PLT) is optimal under the fully-informed rational expectations (FIRE) benchmark but lacks empirical support. Given the hurdles to the implementation of macroeconomic field experiments, we utilize a laboratory group experiment - where expectations are elicited from human...

Blanchard (2005) suggested that active interest rate policy might induce unstable dynamics in highly-indebted economies. We examine this in a dynamic general equilibrium model where Calvo-type price rigidities provide a rationale for inflation stabilization. Unstable dynamics can occur when the...

We study the consequences of non-neutrality of government debt for macroeconomic stabilization policy in an environment where prices are sticky. Assuming transaction services of government bonds, Ricardian equivalence fails because public debt has a negative impact on its marginal rate of return...