During long periods of history, countries have pegged their currencies to an international standard (such as gold or the U.S. dollar), severely restricting their ability to create money and affect output, prices, or government revenue. Nevertheless, countries generally have maintained their own...

Over the past thirty years, a great deal of business cycle research has been based on purely real models that abstract from the presence of nominal rigidities, and so (at least implicitly) assume that the Phillips curve is vertical. In this paper, I show that such models are fragile, in the...

This paper uses an example to show that a model that fits the available data perfectly may provide worse answers to policy questions than an alternative, imperfectly fitting model. The author argues that, in the context of Bayesian estimation, this result can be interpreted as being due to the...

In a wide range of economic settings, equilibrium outcomes in pure credit equilibria are known to be Pareto optimal (or Pareto optimal given informational or enforcement limitations). In a series of examples, I demonstrate how the above equivalence result can be used to provide a more complete...

Narayana Kocherlakota is Professor of Economics at Stanford University. He works on optimal taxation, social insurance, and the micro-foundations of money.

This paper investigates whether a bank regulator should terminate problem banks promptly or exercise forbearance. We construct a dynamic model economy in which entrepreneurs pledge collateral, borrow from banks, and invest in long-term projects. We assume that collateral value has aggregate risk...

In this paper, we consider economies in which agents are privately informed about their skills, which are evolving stochastically over time. We require agents’ preferences to be weakly separable between the lifetime paths of consumption and labor. However, we allow for intertemporal...