This paper analyzes the possible inception of rational inflationary bubbles under the assumption that the empirically relevant environment precludes the existence of rational deflationary bubbles. The analysis shows that if a rational inflationary bubble exists, then it must have started on the...

This paper reports empirical tests for the existence of rational bubbles in stock prices. The analysis focuses on a familiar model that defines market fundamentals to be the expected present value of dividends, discounted at a constantrate, and defines a rational bubble to be a self-confirming...

A rational bubble would involve a self-confirming belief that an asset price depends on information that includes variables or parameters that are not part of market fundamentals. The existing literature shows that, if market fundamentals are economically interesting, i.e., forward looking, any...

This paper describes a theoretical and empirical study of the possibility of rational bubbles in the relative price ofgold. The critical implication of the theoretical analysis is that, if rational bubbles exist, the time series of the relative price of gold, as well as any time series obtained...

The solution to a linear model in which supply and/or demand depends on rational expectations of future prices can involve three parts, which we denote as the fundamental component, the deterministic bubble component, and the stochastic bubble component. This paper explores the properties of...

A new theory of price determination suggests that if primary surpluses are independent of the level of debt, the price level has to jump' to assure fiscal solvency. In this regime (which we call Fiscal Dominant), monetary policy has to work through seignorage to control the price level. If on...

Formation of the Euro area raises new questions about the coordination of monetary and fiscal policy. Using a New Neoclassical Synthesis (NNS) model, we show that a common monetary policy, responding to area-wide aggregates, has asymmetric effects on countries within the union, depending on...

We calculate the welfare cost of nominal inertia in a New Neoclassical Synthesis model with wage and price stickiness, capital formation, and empirically estimated rules for government spending and the cental bank's interest rate policy. We calibrate our model to U.S. data, and we show that it...

Fifty years ago, the Chicago School argued that flexible exchange rates would insulate employment from foreign economic disturbances: there is no need for policy coordination; flexible exchange rates suffice. Twenty five years later, the Bretton Woods system was gone, and the first generation of...