This paper measures the welfare gain from removing aggregate consumption fluctuations starting from an economy in which each individual faces both aggregate and idiosyncratic income shocks, and incomplete consumption insurance. We show that, because this welfare gain is a convex function of the...

This paper provides some empirical estimates on how tightly is it feasible to control inflation in a very small open economy such as Iceland. Estimated macroeconomic models of Canada, Iceland, New Zealand, the United Kingdom, and the United States are used to derive efficient monetary policy...

The optimal reserve level theory aims to protect the economy against external shocks to its balance of payments, providing the international liquidity needed in emergency situations. The methodological applications available have limitations that compromise the results of the analysis of the...

The recent recovery in Latin America has been impressive but also raises the question whether this represents a fundamental break with the region's history of boom-bust cycles. The paper traces how this history of macroeconomic volatility and financial crisis over the past century has adversely...

Viewing fiscal policies as the outcome of democratically resolved conflicts of households over public goods and taxes, the quot;economic model of politicsquot; proposes a public choice approach, which does not rely on social welfare functions. With it, a country's overall budget can be derived...

We analyze the macroeconomic implications of a transient interest-rate peg in combination with a QE program in a non-linear medium-scale DSGE model. In this context, we re-examine what has become known as the reversal puzzle (Carlstrom, Fuerst and Paustian, 2015) and provide an analytical...

How and under what circumstances can adjusting the inflation target serve as a stabilization-policy tool and contribute to welfare improvement? We answer these questions quantitatively with a standard New Keynesian model that includes cost-push type shocks which create a trade-off between...

The effectiveness of forward guidance depends on the credibility of the central bank. This paper sheds light on the credible forward guidance that a central bank can offer by solving for the whole set of sustainable sequential equilibrium (SSE) in a canonical New Keynesian model with...

As the author describes it, the Federal Reserve’s muddled mandate to attain simultaneously the incompatible goals of maximum employment and price stability invites short-term-oriented discretionary policymaking inconsistent with the systematic approach needed for monetary policy to...

Does raising an inflation target require increasing the nominal interest rate in the short run? We answer this question using a standard New Keynesian model with rich backward-looking elements. We first analytically show that the short-run comovement between inflation and the nominal interest...