We propose a regime-switching approach to deal with the lower bound on nominal interest rates in dynamic term structure modelling. In the "lower bound regime", the short term rate is expected to remain constant at levels close to the effective lower bound; in the "normal regime", the short rate...

We study aggregate, distributional, and welfare effects of a permanent reduction in the capital tax rate in a dynamic equilibrium model with capital-skill complementarity. Such a tax reform leads to expansionary long-run aggregate effects, but is coupled with an increase in the skill premium....

This paper uses two established DSGE models (QUEST III and Smets-Wouters) to assess the impact of fiscal spending cuts on output and, in particular, also on inflation in the euro area under alternative settings for monetary policy. We compare four different settings of constrained monetary...

While high uncertainty is an inherent implication of the economy entering the zero lower bound, deflation is not, because agents are likely to be uncertain about the way policymakers will deal with the large stock of debt arising from a severe recession. We draw this conclusion based on a...

In a fixed-regime setting, it is known since Leeper (1991) that both monetary dominance (mix of active monetary and passive fiscal policies) and fiscal dominance (mix of active fiscal and passive monetary policy) regimes yield a determinate unique equilibrium. This paper shows that in a...

What instruments of monetary policy must be used in order to implement a unique equilibrium? This paper revisits the issues addressed by Sargent and Wallace (1975) on the multiplicity of equilibria when policy is conducted with interest rate rules. We show that the appropriate interest rate...

We study aggregate, distributional, and welfare effects of a permanent reduction in the capital tax rate in a quantitative model with capital-skill complementarity and household heterogeneity. Such a tax reform leads to expansionary long-run aggregate output and investment effects, but those are...

We study aggregate, distributional and welfare effects of a permanent reduction in the capital tax rate in a quantitative equilibrium model with capital-skill complementarity. Such a tax reform leads to expansionary long-run aggregate effects, but is coupled with an increase in wage and income...

The biggest and most well-known unsolved problem in academic finance is famously referred to as the Equity Premium Puzzle. It refers to the unexplained phenomenon that for over 100 years the average return on a well-diversified portfolio of equities has far outperformed that of risk-free,...