Prevalent thinking about liquidity traps suggests that the perfect substitutability of money and bonds at a zero short-term nominal interest rate renders open-market operations ineffective for achieving macroeconomic stabilization goals. In an earlier paper, we showed that this reasoning does...

This paper shows that the optimal extraction of seigniorage implies a strong tendency for inflation to fall over time toward its socially optimal level. The point is made using a multi-period model in which (i) the government can finance deficits through bond issue or money creation, (ii)...

This paper explores the links between macroeconomic developments, especially monetary policy, and the exchange rate during the period of Japan's bubble economy and subsequent stagnation. The yen experienced epic gyrations over that period, starting with its rapid ascent after the March 1985...

Even when the exchange-rate plays no expenditure-switching role, countries may wish to have flexible exchange rates in order to free the domestic interest rate as a stabilization tool. In a setting with nontraded goods, exchange-rate movements may also enhance international risk sharing

This paper is a partial exploration of mechanisms through which global factors influence the tradeoffs that U.S. monetary policy faces. It considers three main channels. The first is the determination of domestic inflation in a context where international prices and global competition play a...

In recent years, many countries have instituted monetary reforms aimed at improving anti-inflation credibility. Is it a problem, however, that international welfare spillover effects seldom receive much consideration in the design of monetary reforms? Surprisingly, the answer may be no. Under...

The paper develops a simple stochastic new open economy macroeconomic model based on sticky nominal wages. Explicit solution of the wage-setting problem under uncertainty allows one to analyze the effects of the monetary regime on welfare, expected output, and the expected terms of trade....

The exchange-rate regime is often seen as constrained by the monetary policy trilemma, which imposes a stark tradeoff among exchange stability, monetary independence, and capital market openness. Yet the trilemma has not gone without challenge. Some (e.g., Calvo and Reinhart 2001, 2002) argue...

This paper is a highly selective review of our knowledge about the scope for sterilized intervention in foreign exchange markets under alternative exchange-rate regimes. Section I demonstrates the potential importance of simultaneous-equations bias in single-equation econometric studies of the...

This paper surveys recent research in open-economy macroeconomics, using questions raised by European economic and monetary unification to guide the topics discussed. A striking empirical regularity is the tendency for changes in the nominal exchange rate regime systematically to affect the...