Can monetary policy trigger pronounced boom-bust cycles in house prices and create persistent business cycles? We address this question by building heuristics into an otherwise standard DSGE model. As a result, monetary policy sets off waves of optimism and pessimism ('animal spirits') that...

This paper develops a dynamic stochastic general equilibrium model with rational inattention. Households and decision-makers in firms have limited attention and decide how to allocate their attention. The paper studies the implications of rational inattention for business cycle dynamics. Impulse...

Expectations play a central role in modern macroeconomics. The econometric learning approach, in line with the cognitive consistency principle, models agents as forming expectations by estimating and updating subjective forecasting models in real time. This approach provides a stability test for...

We analyse some practical aspects of implementing adaptive learning in the context of forward-looking linear models. In particular, we focus on how to set initial conditions for three popular algorithms, namely recursive least squares, stochastic gradient and constant gain learning. We propose...

This paper shows how particle filtering allows us to undertake likelihood-based inference in dynamic macroeconomic models. The models can be nonlinear and/or non-normal. We describe how to use the output from the particle filter to estimate the structural parameters of the model, those...

The micro evidence indicates that small firms grow faster than big firms. I argue that this relationship between the expected growth rate of a firm and its size may provide a micro foundation for the well-known high degree of persistence of shocks to aggregate output. The logic goes as follows....

Economic decisions such as occupational and entrepreneurial choices may violate true comparative advantage when economic agents are uncertain about which activity best matches their talents. If relative performance varies over the business cycle (for instance, if downturns affect...

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...

Survey respondents strongly disagree about return risks and, increasingly, macroeconomic uncertainty. This may have contributed to higher asset prices through increased use of collateralisation, which allows risk-neutral investors to realise perceived gains from trade. Investors with lower risk...

We investigate the role of information spillovers (IS) in determining firms' labour adjustments. We test the proposition that information on relevant state variables spills over through one firm's decision to affect those of other firms. Our test is based on the assumption that spillovers matter...