The recently observed disconnect between inflation and economic activity can be explained by the interplay between the zero lower bound (ZLB) and the costs of external financing. In normal times, credit spreads and the nominal interest rate balance out; factor costs dominate firms' marginal...

This paper shows that the optimal monetary policies recommended by New Keynesian models still imply a large amount of inflation risk. We calculate the term structure of inflation uncertainty in New Keynesian models when the monetary authority adopts the optimal policy. When the monetary policy...

Fifty years ago, Milton Friedman articulated the natural rate hypothesis. It was composed of two sub-hypotheses: First, the natural rate of unemployment is independent of monetary policy. Second, there is no long-run tradeoff between the deviation of unemployment from the natural rate and...

A regime shift towards increased inflation expectations is credited with jumpstarting the recovery from the Great Depression in the United States. Germany experienced a recovery as fast and strong in the 1930s. What role did inflation expectations play at the start of this remarkable economic...

How does competition affect information acquisition of firms and thus the response of inflation and output to monetary policy shocks? This paper addresses these questions in a new dynamic general equilibrium model with both dynamic rational inattention and oligopolistic competition. In the...

How does competition affect information acquisition of firms and thus the response of inflation and output to monetary policy shocks? This paper addresses these questions in a new dynamic general equilibrium model with both dynamic rational inattention and oligopolistic competition. In the...

We explore two issues triggered by the global financial crisis. First, in most advanced countries, output remains far below the pre-recession trend, suggesting hysteresis. Second, while inflation has decreased, it has decreased less than anticipated, suggesting a breakdown of the relation...

We explore two issues triggered by the crisis. First, in most advanced countries, output remains far below the pre-recession trend, suggesting hysteresis. Second, while inflation has decreased, it has decreased less than anticipated, suggesting a breakdown of the relation between inflation and...

In this paper the role of behavioral forecasting rules of chartist and fun-damentalist type for the dynamic macroeconomic stability of a two-country system is investigated both analytically and numerically. The main result of the paper is that for large trend-chasing parameters in the chartist...