Euler equations are the key link between monetary policy and the real economy in NK models. Under separable preferences, they fail to match interest rates. Non-separability between leisure and consumption significantly improves their fit and reliability for studying monetary policy.

An influential paper by Clarida, Galí, and Gertler (2000) has attributed the great inflation of the 1970s to the violation of the Taylor principle in the conduct of U.S. monetary policy (weak, indeterminacy inducing response to expected inflation). We evaluate this thesis in the context of a...

We revisit the contribution of misperceived money to business cycles and, in particular, to the inertial dynamics of inflation following a monetary policy shock. We establish three things. First, the difference between preliminary and revised money data captures monetary misperceptions well....

The Calvo scheme represents the standard specification of price resetting in the New Keynesian model. We show that using this rather than a fixed duration (Taylor) scheme matters importantly for the dynamics of the model as it allows it to generate hump-shaped response of output without an...