The author provides a rigorous analysis of Milton Friedman's parable of the "helicopter" drop of money a permanent/irreversible increase in the nominal stock of fiat base money rate which respects the intertemporal budget constraint of the consolidated Central Bank and Treasury - the State....

This paper provides a framework for modeling the risk-taking channel of monetary policy, the mechanism how financial intermediaries' incentives for liquidity transformation are affected by the central bank's reaction to financial crisis. Anticipating central bank's reaction to liquidity stress...

We introduce banks that issue liquid deposits backed by bonds and capital into an otherwise standard cash-in-advance economy. Liquidity transformation by banks increases aggregate consumption and investment relative to a cash-only economy but can also lead to inefficient overinvestment....

When agents are liquidity constrained, two options exist - borrow or sell assets. We compare the welfare properties of these options in two economies: in one, agents can borrow (issue inside bonds) and in the other they can sell government bonds (outside bonds). All transactions are voluntary,...

The composition of public debt by maturity is irrelevant in the standard New Keynesian model of monetary policy. Nevertheless, central banks have, since the outset of the crisis, purchased large amounts of government bonds in the attempt to support economic activity and stem deflationary...

This article shows that the "risk premium" shock in Smets and Wouters (2007) can be interpreted as a structural shock to the demand for safe and liquid assets such as short-term US Treasury securities. Several implications of this interpretation are discussed.

For economies in which the real rate of return on money is too low, the standard prescription is to deflate prices according to the Friedman rule. Implicit in this recommendation is the availability of a lump-sum tax instrument. In this paper, I view lump-sum tax obligations as a form of debt...

We compute a sunspot equilibrium in an estimated small-scale New Keynesian model with a zero lower bound (ZLB) constraint on nominal interest rates and a full set of stochastic fundamental shocks. In this equilibrium a sunspot shock can move the economy from a regime in which inflation is close...

We propose and solve a small-scale New-Keynesian model with Markov sunspot shocks that move the economy between a targeted-inflation regime and a deflation regime and fit it to data from the U.S. and Japan. For the U.S. we find that adverse demand shocks have moved the economy to the zero lower...

This paper assesses the role that monetary policy plays in the decision to default using a General Equilibrium model with collateralized loans, trade in fiat money and production. Long-term nominal loans are backed by collateral, the value of which depends on monetary policy. The decision to...