The recent global financial crisis illustrates that financial frictions are a significant source of volatility in the economy. This paper investigates monetary policy stabilization in an environment where financial frictions are a relevant source of macroeconomic fluctuation. We derive a measure...

Variable and high rates of price inflation in the 1970s and 1980s led many countries to delegate the conduct of monetary policy to "instrument-independent" central banks and to give their central banks a clear mandate to pursue price stability and instrument independence to achieve it. Advances...

Existing papers studying optimal monetary policy when the central bank makes errors in measuring potential output typically treat those errors as exogenous to the model of the economy. Here we show that this is not an innocuous assumption, and can have important implications for optimal monetary...

This paper analyzes the performative impact of the European Commission's model for estimating 'potential output', which is used as a yardstick for measuring the 'structural budget balance' of EU countries and, hence, is crucial for coordinating European fiscal policies. In pre-crisis years,...