Real-business-cycle models rely on total factor productivity (TFP) shocks to explain the observed co-movement among consumption, investment and hours. However an emerging body of evidence identifies “investment shocks” as important drivers of business cycles. This paper shows that a...

Under rational expectations monetary policy is generally highly effective in stabilizing the economy. Aggregate demand management operates through the expectations hypothesis of the term structure --- anticipated movements in future short-term interest rates control current demand. This paper...