This paper investigates how the stock market reacts to the Federal Reserve's ability to tame inflation through rate hikes. Since investors do not directly observe the speed at which rate hikes reduce inflation, they need to learn about it by observing inflation prints. When investors realize...

We prove the existence of monetary equilibrium in a finite horizon economy with production. We also show that if agents expect the monetary authority to significantly decrease the supply of bank money available for short term loans in the future, then the economy will fall into a liquidity trap...

This Policy Analysis explains the antecedents of the current global financial crisis and critically examines the reasoning behind the U.S. Treasury and Federal Reserve's actions to prop up the financial sector. It argues that recovery from the financial crisis is likely to be slow with or...

We show theoretically that inflation disagreement drives a wedge between real and nominal yields and raises their levels and volatilities. We demonstrate empirically that an inflation disagreement increase of one standard deviation raises real and nominal yields and their volatilities,...

This paper studies the effect of FOMC announcements on the dynamics of heterogeneous beliefs. The open interest of options decreases significantly after announcements, implying the associated high trading volume comes from unwinding positions with less disagreement. To measure this effect, I...

We show that inflation disagreement, not just expected inflation, has an impact on nominal interest rates. In contrast to expected inflation, which mainly affects the wedge between real and nominal yields, inflation disagreement affects nominal yields predominantly through its impact on the real...

The links between real and nominal bond risk premia and macroeconomic dynamics are explored analytically and quantitatively in a model with nominal rigidities and monetary policy. The interest-rate policy rule becomes a restriction linking real and nominal risk premia through endogenous...

We show that the interplay between endogenous limited participation and credit lines creates asset price bubbles in a simple exchange economy with three types of agents: regular stockholders, arbitrageurs and liquidity providers. Regular stockholders are worse off in the economy with credit...

The bond yield dynamics implied by a welfare-maximizing monetary policy and its credibility are explored in general equilibrium. Credibility is captured by a regime change from discretion to commitment. The policy determines the optimal output and inflation responses to a source of inflation...

In our model, cross-currency basis, which captures the deviations from covered interest rate parity (CIP), reflects the relative value of the scarcer currency (US dollar) as collateral in funding constraints. Our empirical evidence shows that measures of dollar shortage derived from ECB tenders,...