The US Federal Reserve cut interest rates more vigorously in the recent recession than the European Central Bank did. By comparison with the Fed, the ECB followed a more measured course of action. We use an estimated dynamic general equilibrium model with financial frictions to show that...

"Using "business cycle accounting" (BCA), Chari, Kehoe and McGrattan (2006) (CKM) conclude that models of financial frictions which create a wedge in the intertemporal Euler equation are not promising avenues for modeling business cycle dynamics. There are two reasons that this conclusion is not...

Public finance has both normative and positive elements, and moving between theory and practice requires attention to help us understand both what policies government should adopt and whether it is likely to do so. We should not be surprised when bad policies are adopted in spite of better...