We study the effects of permanent and temporary income shocks on precautionary saving and investment in a ""store-or-sow"" model of growth. High volatility of permanent shocks results in high precautionary saving in the safe asset and low investment, or a ""volatility trap."" Namely, big savers...

This paper highlights the importance of debt composition in setting optimal fiscal and monetary policy over short-run business cycles and in the long run. Nominal debt as state-contingent debt can be a significant policy tool to reduce the volatility of distortionary government policy, thereby...

The paper uses MULTIMOD to examine the implications of uncertain exchange rate pass-through for the conduct of monetary policy. From the policymaker''s perspective, uncertainty about exchange rate pass-through implies uncertainty about policy multipliers and the impact of state variables on...

Using stochastic simulations and stability analysis, the paper compares how different monetary rules perform in a moderately nonlinear model with a time-varying nonaccelerating-inflation-rate-of-unemployment (NAIRU). Rules that perform well in linear models but implicitly embody backward-looking...

To achieve their price stability objectives, many monetary authorities use the gap between current and potential output as an indicator of future price pressures. This policy-setting strategy has been criticized because potential output estimates have a high degree of uncertainty. In this paper,...

The macroeconomic policy response in India after the North Atlantic financial crisis (NAFC) was rapid. The overshooting of the stimulus and its gradual withdrawal sowed seeds for inflationary and BoP pressures and growth slowdown, then exacerbated by domestic policy bottlenecks and volatility in...