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 analyse the impact of interactions between monetary and fiscal policy on macroeconomic stability. We find that in the presence of sovereign default beliefs a monetary policy, which aims to stabilize inflation through an active interest rate policy, will destabilize the economy if the feedback...

Here the author empirically estimates if the different monetary and exchange rate frameworks observed in the Accession Countries of Central and Eastern Europe and the Baltics do yield different outcomes in terms of level and variance of a set of nominal and real variables. The author follows and...

Can fixed exchange rate regimes cause output divergence among member states? We show that such divergence is a long-run equilibrium characteristic of a two-region model with fixed exchange rates, heterogeneous labor markets, and endogenous growth. Under flexible exchange rates, monetary policy...

The recent macroeconomic literature stresses the importance of managing heterogeneous expectations in the formulation of monetary policy. We use a stylized macro model of Howitt (1992) to investigate inflation dynamics under alternative interest rate rules when agents have heterogeneous...

We investigate the implications for the setting of interest rateswhen monetary policy decisions are taken by a committee, in whicha subset of members may meet prior to the voting in the committeeand therefore has the possibility to reach consensus ex ante to voteunanimously ex post. We allow for...

Empirical estimations suggest heavy-tailed unconditional distributions for inflation, the output gap and the interest rate. However, standard NK models used in policy analysis imply normal distributions for these variables. In this study, we propose a model which replicates the above mentioned...

Central banks with an exchange rate objective set the interest rate in response to what they call "pressure." Instead, existing interest rate rules rely on the exchange rate minus its target. To stay closer to actual policy, we introduce a rule that uses exchange market pressure (EMP), the...