What are the economic effects of an interest rate cut when an economy is in the midst of a financial crisis? Under what conditions will a cut stimulate output and employment, and raise welfare? Under which will it have the opposite effects? The authors answer these questions in a general class...

Using “business cycle accounting,” Chari, Kehoe, and McGrattan (2006) 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...

The "ideal" band-pass filter can be used to isolate the component of a time series that lies within a particular band of frequencies, but applying this filter requires a data set of infinite length. In practice, some sort of approximation is needed. Using projections, the authors derive...

The authors evaluate the Friedman-Schwartz hypothesis--that a more accommodative monetary policy could have greatly reduced the severity of the Great Depression. To do this, they first estimate a dynamic, general equilibrium model using data from the 1920s and 1930s. Although the model includes...

The authors illustrate the use of various frequency-domain tools for estimating and testing dynamic, stochastic, general-equilibrium models. Their substantive results confirm other findings that suggest that time-to-plan in investment technology has a potentially useful role to play in...

The authors’ model, embodying moderate amounts of nominal rigidities, accounts for the observed inertia in inflation and persistence in output. The key features of their model are those that prevent a sharp rise in marginal costs after an expansionary shock to monetary policy. Of these...

Macroeconomic and microeconomic data paint conflicting pictures of price behavior. Macroeconomic data suggest that inflation is inertial. Microeconomic data indicate that firms change prices frequently. We formulate and estimate a model which resolves this apparent micro - macro conflict. Our...

The Gaussian log-likelihood can be expressed as the sum over different frequency components. This implies that the likelihood ratio statistic has a similar linear decomposition. Exploiting these observations, the authors devise diagnostic methods that are useful for interpreting...

The authors use the limited participation model of money to study Taylor rules' operating characteristics for setting the interest rate. Rules are evaluated according to their ability to protect the economy from bad outcomes like the burst of inflation observed in the 1970s. On the basis of...

A description and comparison of several algorithms for approximating the solution to a model in which inequality constraints occasionally bind. Their performance is evaluated using various parameterizations of the one-sector growth model with irreversible investment.