I show that parity realignments alone do not suffice to ensure the long-run sustainability of an exchange rate target zone with imperfect credibility due to the gambler's ruin problem. However, low credibility and frequent realignments can destabilize the exchange rate

Using a panel of survey-based measures of future interest rates from the Survey of Professional Forecasters, we study the dynamic relationship between shocks to monetary policy expectations and fluctuations in economic activity and inflation. We propose a small-scale structured recursive vector...

This paper provides both theoretical insight as well as empirical evidence in support of the view that inflation is largely a global phenomenon. First, we show that inflation across countries incorporates a significant common factor captured by global inflation. Second, we show that in theory a...

This paper considers the solution of a large class of linear rational expectations (LRE) models and its characterization via finite-order VARs. The solution of the canonical LRE model can be cast in state-space form and solved for by the method of undetermined coefficients. In this paper I...

This paper develops a tractable two-country DSGE model with sticky prices à la Calvo (1983) and local-currency pricing. We analyze the capital investment decision in the presence of adjustment costs of two types, the capital adjustment cost (CAC) specification and the investment adjustment cost...

This technical note is developed as a mathematical companion to the paper ‘The Real Exchange Rate in Sticky Price Models: Does Investment Matter?' (GMPI working paper no.17). It contains three basic calculations. First, we derive the equilibrium conditions of the model. Second, we compute the...

We investigate the Bayesian approach to model comparison within a two-country framework with nominal rigidities using the workhorse New Keynesian open-economy model of Martínez-García and Wynne (2010). We discuss the trade-offs that monetary policy — characterized by a Taylor-type rule —...

This technical note is developed as a companion to the paper ‘Assessing Bayesian Model Comparison in Small Samples' (Globalization and Monetary Policy Institute working paper no. 189). Taking the workhorse open-economy model of Martínez-García and Wynne (2010) with nominal rigidities under...