This paper studies the effect of interest rates on investment in an environment where firms make irreversible investments and learn over time. In this setting, changes in the interest rate affect both the cost of capital and the cost of delaying investment. These two forces combine to generate...

The interest rate is a key determinant of firm investment. We integrate a widely used term structure model of interest rates, CIR (Cox, Ingersoll, and Ross (1985)), with the q theory of investment (Hayashi (1982) and Abel and Eberly (1994)). We show that stochastic interest rates have...

We review evidence on the Great Moderation in conjunction with evidence about volatility trends at the micro level. We combine the two types of evidence to develop a tentative story for important components of the aggregate volatility decline and its consequences. The key ingredients are...

In a world of integrated capital markets, the price of credit - which I measure by short-term expected real interest rates - is determined to equate the world aggregate of investment demand to the world aggregate of desired national saving. I implement this approach empirically by approximating...

Standard deficit accounting neglects the growth dividend: the amount by which annual GDP growth shrinks the debt-GDP ratio. America's growth dividend has more than doubled since the Great Recession because the debt ratio has more than doubled, leading to headline deficits that far exceed changes...

This paper studies a form of liquidity risk that we call 'Liquidity After Solvency Hedging' or "LASH" risk. Financial institutions take LASH risk when they hedge against solvency risk, using strategies that require liquidity when the solvency of the institution improves. We focus on LASH risk...

A common view is that deposit rates are determined primarily by supply: depositors require higher deposit rates from risky banks, thereby creating market discipline. An alternative perspective is that market discipline is limited (e.g., due to deposit insurance and/or enhanced capital...

Mortgage interest tax deductibility is needed to treat debt and equity financing of homes equally. Countries that limit deductibility create a debt tax penalty that presumably leads households to shift from debt toward equity financing. The greater the shift, the less is the tax revenue raised...