Using a New-Keynesian flexi-price model with external habit formation in consumption and labor supply, we identify the channels underlying the Easterlin Paradox (or “Happiness Inertia”, its generalization). These include whether external habit formation is in “difference” or “ratio”...

This paper empirically assesses the performance of interest-rate monetary rules for interdependent economies characterized by model uncertainty. We set out a two-bloc dynamic stochastic general equilibrium model with habit persistence (that generates output persistence), Calvo pricing and...

We apply an optimizing model with relative comparisons (habit formation) in consumption and labour supply to the economics of happiness, specifically the 'Easterlin paradox'. Studying a generalization of the paradox, which we label the 'happiness puzzle', we analyse ways in which income growth...

This paper explores the similarity of the underlying economic problems that lead to the establishment of (a) independent central banks to operate national monetary policies and (b) independent regulatory agencies for telecommunications and other utility service industries. We show that, in both...

We contribute to a recent literature on the normalization, calibration and estimation of CES production functions. The problem arises because CES 'share' parameters are not in fact shares, but depend on underlying dimensions - they are 'dimensional constants' in other words. It follows that such...

We analyse the effects of a government spending expansion in a dynamic stochastic general equilibrium (DSGE) model with Mortensen-Pissarides labour market frictions, deep habits and a constant-elasticity-of-substitution (CES) production function. The combination of deep habits and CES technology...

Dynamic principal-agent settings with asymmetric information but no commitment are well known to create a ratchet effect. Here, the most efficient agents must be provided with extra 'information rent' as an incentive to relinquish their informational advantage over an uninformed principal; this...

How does informality in emerging economies affect the conduct of monetary policy? To answer this question we construct a two-sector, formal-informal new Keynesian closed-economy. The informal sector is more labour intensive, is untaxed, has a classical labour market, faces high credit...

We present a model of transnational terrorism where two countries, home and foreign, face a terrorist threat based in the foreign country. The home country chooses how much to invest in defending itself or in reducing terrorist resources either indirectly by subsidising the foreign country or by...