This paper develops an analytically tractable general-equilibrium model of inventory dynamics based on a precautionary stockout-avoidance motive. The model’s predictions are broadly consistent with the U.S. business cycle and key features of inventory behavior. It is also shown that...

Large uninsured risk, severe borrowing constraints, and rapid income growth can create excessively high household saving rates and large current account surpluses for emerging economies. Therefore, the massive foreign-reserve buildups by China are not necessarily the intended outcome of any...

The current global-imbalance literature (which explains why capital flows from poor to rich countries) cannot explain China’s foreign asset positions because capital cannot flow out of China under capital controls. A related but deeper puzzle that this literature fails to address is China’s...

We formalize the Keynesian insight that aggregate demand driven by sentiments can generate output fluctuations under rational expectations. When production decisions must be made un- der imperfect information about aggregate demand, optimal decisions based on sentiments can generate stochastic...

This paper develops an analytically tractable Bewley model of money featuring capital and financial intermediation. It is shown that when money is a vital form of liquidity to meet uncertain consumption needs, the welfare costs of inflation can be extremely large. With log utility and parameter...

Financial capital and fixed capital tend to flow in opposite directions between poor and rich countries. Why? What are the implications of such two-way capital flows for global trade imbalances and welfare in the long run? This paper introduces frictions into a standard two- country neoclassical...

This paper provides a general equilibrium multi-stage production model to explain the co-existence and co-movement of output- and input-inventories. The model offers a neoclassical perspective on the propagation mechanism of demand uncertainty. It reveals that uncertainty in demand at downstream...

The extremely weak propagation mechanisms of real business cycle (RBC) models are well acknowledged, and some effort has been devoted to improving the models on this dimension. This paper builds on these efforts to provide an explicit explanation of why various existing RBC models do not...

The research led by Gali (AER 1999) and Basu et al. (AER 2006) raises two important questions regarding the validity of the RBC theory: (i) How important are technology shocks in explaining the business cycle? (ii) Do impulse responses to technology shocks found in the data reject the assumption...

A large empirical literature attempts to identify US monetary policy shocks using the effective federal funds rate. This paper compares the time series behavior of the effective federal funds rate to 10 US interest rates with maturities ranging form overnight to 10 years. Using a spectral...