This paper investigates theoretically how financial development affects the magnitude of financial amplification. Financial development yields two competing effects, balance sheet effects and shock cushioning effects. Depending on which of these forces dominates, we find that financial...

This paper proposes a measure of real-time inflation expectations based on metadata, i.e., data about data, constructed from internet search queries performed on the search engine Google. The forecasting performance of the Google Inflation Search Index (GISI) is assessed relative to 37 other...

We show how since the mid 1980s expansionary monetary policies in the large economies and “vagabonding liquidity” have contributed to bubbles in the new and emerging markets. Based on the monetary overinvestment theories of Hayek and Wicksell we describe a wave of bubbles and crises that was...

A recent study shows that equilibrium indeterminacy arises if monetary policy responds to asset prices, especially share prices, in a sticky-price economy. We show that equilibrium indeterminacy never arises if the working capital of firms is subject to their asset values by financial frictions.

This paper analyzes housing market boom-bust cycles driven by changes in households'expectations. We explore the role of expectations not only on productivity but on several other shocks that originate in the housing market, the credit market and the conduct of monetary policy. We find that, in...

The appealing feature of Kiyotaki and Moore's Financial Accelerator model (Kiyotaki and Moore, 1997, 2002) is the linkage of asset price changes and borrowing constraints. This framework therefore is the natural vehicle to explore the net worth channel of the monetary transmission mechanism. In...

This paper is the basis for the Guest Columnist article in the Tuesday, November 11, 2008 issue of the Kansas City Star newspaper's Business Weekly. Because of space limitations, the published newspaper column had to be shortened from the original and unfortunately did not include either of the...

Carlstrom and Fuerst (2007) [``Asset prices, nominal rigidities, and monetary policy,'' Review of Economic Dynamics 10, 256--275] find that monetary policy response to share prices is a source of equilibrium indeterminacy because an increase in inflation implies a high real marginal cost and low...

We augment a closed-economy DSGE model with collateral constraints tied to real estate values by incorporating the time-to-build phenomenon in the housing construction sector. Adding construction sector delays significantly improves business cycle properties of the model relative to the versions...

We construct an open-economy DSGE model with a banking sector to analyse the impact of the recent credit crunch on a small open economy. In our model the banking sector operates under monopolistic competition, collects deposits and grants collateralized loans. Collateral effects amplify monetary...