This article shows that the "risk premium" shock in Smets and Wouters (2007) can be interpreted as a structural shock to the demand for safe and liquid assets such as short-term US Treasury securities. Several implications of this interpretation are discussed.

This paper implements a structural model of the yield curve with data on nominal positions and survey forecasts. Bond prices are characterized in terms of investors' current portfolio holdings as well as their subjective beliefs about future bond payoffs. Risk premia measured by an...

Walter Bagehot's putative principles of lending in liquidity crises - to lend freely to solvent banks with good collateral but at penalty rates - have served as a theoretical basis for thinking about the lender of last resort for close to 100 years, while simultaneously providing justification...

This paper explores whether a limited participation model of the monetary transmission mechanism can account for the observed response of stock market returns to monetary policy shocks. It is found that the model generates responses that broadly match the empirical counterparts, although the...

The paper evaluates the ability of market participants to anticipate monetary policy decisions in the euro area and in 13 other countries. First, by looking at the magnitude and the volatility of the changes in the money market rates we show that the days of policy meetings are special days for...

As financial stability has gained focus in economic policymaking, the demand for analyses of financial stability and the consequences of economic policy has increased. Alternative macroeconomic models are available for policy analyses, and this paper evaluates the usefulness of some models from...

The UK has experienced a dramatic increase in earnings and income inequality over the past four decades. We use detailed micro level information to construct historical measures of inequality from 1968 to 2008. We study whether monetary policy shocks played a significant role in explaining this...

While the mainstream long argued that the central bank could use quantitative constraints as a means to controlling the private creation of money, most economists now recognize that the central bank can only set the overnight interest ratewhich has only an indirect impact on the quantity of...

In the United Kingdom, money demand deviates from the convex relationship suggested by monetary theory. Limited commitment of borrowers via banks can explain this observation. Our finding is based on a microfounded monetary model, where a money market provides insurance against idiosyncratic...

The Chicago Fed dynamic stochastic general equilibrium (DSGE) model is used for policy analysis and forecasting at the Federal Reserve Bank of Chicago. This article describes its specification and estimation, its dynamic characteristics and how it is used to forecast the US economy. In many...