Severe economic downturns, characterized by deleverage, are typically preceeded by phenomena of debt overhang. This evidence suggests that large recessions may not be the result of large shocks, but, rather, of the interaction between typical shocks and the current state of the economy. We study...

Openness per se requires optimal monetary policy to deviate from the canonical closed-economy principle of domestic price stability, even if domestic prices are the only ones to be sticky. I review this argument using a simple partial equilibrium analysis in an economy that trades in ?nal...

The effects of public debt and redistribution are intimately related. We illustrate this in a model with heterogenous agents and imperfect credit markets. Our setup di¤ers from the classic Savers-Spenders model of ?scal policy in that all agents engage in intertemporal optimization, but a...

In an economy with financial imperfections, Ricardian equivalence holds when prices are flexible and the steady-state distribution of consumption is uniform, or labor is inelastic. With different steady-state consumption levels, Ricardian equivalence fails, but tax cuts, somewhat paradoxically,...

We study optimal monetary policy in two prototype economies with sticky prices and credit market frictions. In the first economy, credit frictions apply to the financing of the capital stock, generate acceleration in response to shocks and the ”financial markup” (i.e., the premium on...

We lay out a tractable model for fiscal and monetary policy analysis in a currency union, and analyze its implications for the optimal design of such policies. Monetary policy is conducted by a common central bank, which sets the interest rate for the union as a whole. Fiscal policy is...

There has been a lot of interest recently in developing small scale rule-based empirical macro models for the analysis of monetary policy. These models, based on the conventional view that inflation stabilization should be a concern of monetary policy only, have typically neglected the role of...

We analyze welfare maximizing monetary policy in a dynamic general equilibrium two-country model with price stickiness and imperfect competition. In this context, a typcial terms of trade externality affects policy interaction between independent monetary authorities. Unlike the existing...

Within a small open economy we derive a tractable framework for the analysis of the optimal monetary policy design problem as well as of simple feedback rules. The international relative price channel is emphasized as the one peculiar to the open economy dimension of monetary policy. Hence...

We study the effects on the optimal monetary policy design problem of allowing for deviations from the law of one price in import goods prices. We reach three basic results. First, we show that incomplete pass-through renders the analysis of monetary policy of an open economy fundamentally...