This paper provides a dynamic optimization model of durable good inventories to study the interactions between investment demand and production of capital goods. There are three major findings: First, capital suppliers' inventory behavior makes investment demand more volatile in equilibrium;...

Price rigidity is the key mechanism for propagating business cycles in traditional Keynesian theory. Yet the New Keynesian literature has failed to show that sticky prices by themselves can effectively propagate business cycles in general equilibrium. We show that price rigidity in fact can (by...

This paper proposes a solution method to solve linear difference models with lagged expectations. Variables with lagged expectations expand the model's state space greatly when N is large; and getting the system into a canonical form solvable by the traditional methods involves substantial manual...

Labor hoarding is a widely believed empirical behavior of firms and a prominent explanation for procyclical labor productivity. Conventional wisdom attributes labor hoarding to labor adjustment costs. This paper argues that the conventional wisdom is inadequate for understanding labor hoarding...

We formalize the Keynesian insight that aggregate demand driven by sentiments can generate output fluctuations under rational expectations. When production decisions must be made un- der imperfect information about aggregate demand, optimal decisions based on sentiments can generate stochastic...

This paper develops an analytically tractable Bewley model of money featuring capital and financial intermediation. It is shown that when money is a vital form of liquidity to meet uncertain consumption needs, the welfare costs of inflation can be extremely large. With log utility and parameter...

This paper uncovers Taylor rules from estimated monetary policy reactions using a structural VAR on U.S. data from 1959 to 2009. These Taylor rules reveal the dynamic nature of policy responses to different structural shocks. We find that U.S. monetary policy has been far more responsive over...

Empirical evidence suggests that fast-growing economies tend to have not only high saving rates but also low interest rates. This evidence is difficult to reconcile with standard explanations about the positive linkages between saving and growth. These explanations rely either on high saving to...

Firm-level investment is lumpy and volatile but aggregate investment is much smoother and highly serially correlated. These different patterns of investment behavior have been viewed as indicating convex adjustment costs at the aggregate level but non-convex adjustment costs at the firm level....

China’s average household saving rate is one of the highest in the world. One popular view attributes the high saving rate to fast rising housing prices and other costs of living in China. This article uses simple economic logic to show that rising housing prices and living costs per se cannot...