In this study I examine the welfare implications of monetary policy by constructing a novel New Keynesian model that properly accounts for asset pricing facts. I find that the Ramsey optimal monetary policy yields an inflation rate above 3.5% and inflation volatility close to 1.5%. The same...

The key insight from this analysis is that monetary policy should be responding more to negative shocks than positive shocks: optimal monetary policy is asymmetric. Moreover, if we take the stance that asset prices indicate a high cost of exposure to long-run risks, this has very interesting...

We solve in closed-form a continuous-time Nash equilibrium model in which a finite number of exponential investors continuously consume and trade strategically with price-impact. Compared to the analogous Pareto-efficient equilibrium model, price-impact has an amplification effect on...

We discover a novel monetary policy shock that has a widespread impact on aggregate financial conditions. Our shock can be summarized by the response of long-horizon yields to Federal Open Market Committee (FOMC) announcements; not only is it orthogonal to changes in the near-term path of policy...

The Federal Open Market Committee (FOMC) meetings have significant impact on market returns. We propose a methodology to recover the risk premium associated with FOMC meetings from option prices. We also predict the sizes of upward/downward market price jumps after an imminent FOMC meeting. In...

Treasury securities normally possess unparalleled safety and liquidity and, consequently, carry a money premium. We use recent debt limit impasses, which temporarily increased the riskiness of Treasuries, to investigate the relationship between the money premium, safety, and liquidity. Our...