We assess the contribution of “undue optimism” (Pigou) to short-run fluctuations. In our analysis, optimism pertains to total factor productivity which determines economic activity in the long run, but is not contemporaneously observed by market participants. In order to recover optimism...

We analysed daily returns of the CRSP value weighted and equally weighted indices over 1953-2007 in order to test for Merton's theorised relationship between risk and return. Like some previous studies we used a GARCH stochastic volatility approach, employing not only traditional discrete time...

This paper incorporates a global bank into a two-country business cycle model. The bank collects deposits from households and makes loans to entrepreneurs, in both countries. It has to finance a fraction of loans using equity. We investigate how such a bank capital requirement affects the...

This paper presents a Markov chain Monte Carlo (MCMC)-based estimation procedure for the COGARCH(1,1) model driven by a compound Poisson process. The COGARCH model is a continuous-time analogue to the discrete-time GARCH model and captures many of the stylized facts of financial time series, as...

This paper explores the role of trade integration - or openness - for monetary policy transmission in a medium-scale new Keynesian model. Allowing for strategic complementarities in price-setting, we highlight a new dimension of the exchange rate channel by which monetary policy directly impacts...

In this paper we analyze the ability of an open economy version of the neoclassical model to account for the time-series evidence on fiscal policy transmission. In a first step, we identify government spending shocks within a vector autoregression model. We find that i) government spending...

Austerity measures are frequently enacted when the sustainability of public finances is in doubt. Such doubts are reflected in high sovereign yield spreads and put further strain on government finances. Is austerity successful in restoring market confidence, bringing about a reduction in yield...

We ask whether cuts of government consumption lower or raise the sovereign default premium. To address this question, we set up a new data set for 38 emerging and advanced economies which contains quarterly time-series observations for sovereign default premia, government consumption, and...