In this paper we: (i) provide a model of the endogenous risk intolerance and severe aggregate demand contractions following a large real (non-financial) shock; and (ii) demonstrate the effectiveness of Large Scale Asset Purchases (LSAPs) in addressing these contractions. The key mechanism stems...

We provide a continuous-time “risk-centric” representation of the New Keynesian model, which we use to analyze the interactions between asset prices, financial speculation, and macro- economic outcomes when output is determined by aggregate demand. In principle, interest rate policy is...

The standard view of the political economy of public debt is that myopic and unconstrained politicians prefer to disregard intertemporal smoothing considerations and extract political rents as fast as possible. From this perspective, it seems that the world has much to celebrate, as most...

One of the main economic villains before the crisis was the presence of large "global imbalances." The concern was that the U.S. would experience a sudden stop of capital flows, which would unavoidably drag the world economy into a deep recession. However, when the crisis finally did come, the...

We study the effects of aggregate and idiosyncratic uncertainty on the entry of firms, total investment, and prices in a competitive industry with irreversible investment. We first use standard dynamic programming methods to determine firms' entry decisions, and we describe the resulting...