From a macroeconomic perspective, the short-term interest rate is a policy instrument under the direct control of the central bank. From a finance perspective, long rates are risk-adjusted averages of expected future short rates. Thus, as illustrated by much recent research, a joint...

We estimate a model with latent factors that summarize the yield curve (namely, level, slope, and curvature) as well as observable macroeconomic variables (real activity, inflation, and the stance of monetary policy). Our goal is to provide a characterization of the dynamic interactions between...

This paper develops a small forward-looking macroeconomic model where the Federal Reserve estimates the level of potential output in real time by running a regression on past output data. The Fed's perceived output gap is used as an input to the monetary policy rule while the true output gap...

A central tenet of inflation targeting is that establishing and maintaining well-anchored inflation expectations are essential. In this paper, we reexamine the role of key elements of the inflation targeting framework towards this end, in the context of an economy where economic agents have an...

This paper introduces a form of boundedly-rational expectations into an otherwise standard New-Keynesian Phillips curve. The representative agent's forecast rule is optimal (in the sense of minimizing mean squared forecast errors), conditional on a perceived law of motion for inflation and...

This paper demonstrates that sectoral heterogeneity itself--without any additional bells or whistles--has first-order implications for the transmission of aggregate shocks to aggregate variables in an otherwise standard DSGE model. The effects of sectoral heterogeneity on this transmission are...

The rising current account deficit in the USA has attracted considerable attention in recent years. We use the "business cycle accounting" methodology to identify the principal distortions that have affected the external accounts of the US. In particular, we measure distortions in the optimality...

While most empirical analysis of prediction markets treats prices of binary options as predictions of the probability of future events, Manski (2004) has recently argued that there is little existing theory supporting this practice. We provide relevant analytic foundations, describing sufficient...

Robust control allows policymakers to formulate policies that guard against model misspecification. The principal tools used to solve robust control problems are state-space methods (see Hansen and Sargent 2006 and Giordani and Soderlind 2004). In this paper we show that the structural-form...

Interest in prediction markets has increased in the last decade, driven in part by the hope that these markets will prove to be valuable tools in forecasting, decisionmaking and risk management--in both the public and private sectors. This paper outlines five open questions in the literature,...