We formulate a macro-model of a small open economy in order to investigate the relative performance of rules that respond to asset prices and those that do not. Our model consists of three asset prices: the stock price, the long-term interest rate and the exchange rate. These asset prices...

The problem of monetary and fiscal policy interactions is an important issue for the euro area, since the individual member states of the EMU are responsible for their fiscal policies but monetary policy is pursued by a single monetary authority, the ECB. This paper is concerned with empirical...

The accuracy of the solution of dynamic general equilibrium models has become a major issue. Recent papers, in which second-order approximations have been substituted for first-order, indicate that this change may yield a significant improvement in accuracy. Second order approximations have been...

Following the lead of Merton (1974), recent research has focused on the relationship of credit risk to firm value. Although this has usually been done for a single firm, the growth of structured finance, which necessarily involves the correlation between included securities, has spurred interest...

Using standard preferences for asset pricing has not been very successful to match asset price characteristics such as the risk-free interest rate, equity premium and the Sharpe ratio to time series data. Behavioral finance has recently proposed more realistic preferences such as preferences...

Economic research of the last decade linking macroeconomic fundamentals to asset prices has revealed evidence that standard intertemporal asset pricing theory is not successful in explaining (unconditional) first moments of asset market characteristics such as the risk free intrest rate, stock...

In this paper we demonstrate that a standard loss function of a central bank may generate multiple equilibria which can contribute to hysteresis effects on the labor market. Multiple equilibria are feasible if the objective function of the central bank is non-quadratic. Such preferences may...