The strong response of long-term interest rates to macroeconomic shocks has typically been explained in terms of informational asymmetries between the central bank and private agents. The standard models assume that the equilibrium real interest rate is constant over time and independent of...

This paper explains the emergence of liquidity traps in the aftermath of large-scale financial crises, as happened in the US 1930s, Japan 1990s and recently in the US and Europe. The paper introduces a new balance sheet channel that links equity capital to the risk-free interest rate. When...

We test the expectations hypothesis by analyzing changes in three month T-Bill rates (TB3) after FOMC meetings. By estimating the revisions in expectations of future overnight rates, we find a one-to-one relationship between changes in TB3 and path revisions.

In this paper we propose a strategy for forecasting the term structure of interest rates which may produce significant gains in predictive accuracy. The key idea is to use the restrictions implied by Affine Term Structure Models (ATSM) on a vector autoregression (VAR) as prior information rather...

This paper studies how capital market imperfections affect the welfare effects of forming a currency union. The analysis considers a bank-only world where intermediaries compete in Cournot fashion and monitoring and state verification are costly. The first part determines the credit market...

This paper studies how capital market imperfections affect the welfare effects of forming a currency union. The analysis considers a bank-only world where intermediaries compete in Cournot fashion and monitoring and state verification are costly. The first part determines the credit market...

We bring together some recent advances in the literature on vector autoregressive moving-average models creating a relatively simple specification and estimation strategy for the cointegrated case. We show that in the cointegrated case with fixed initial values there exists a so-called final...

The existing literature on the stabilizing properties of interest-rate feedback rules has stressed the perils of linking interest rates to forecasts of future inflation. Such rules have been found to give rise to aggregate fluctuations due to self-fulfilling expectations. In response to this...

This paper assesses the contribution of monetary policy to the dynamics of bond real returns. We assume that the monetary authority controls the short-term nominal interest rate. We then model exogenously the joint dynamics of the aggregate endowment and the monetary policy variable, and...

Following a contractionary monetary policy shock, the aggregate output decreases over time for six to eight quarters, while the real interest rate increases immediately and remains high for three quarters. Full participation models can hardly replicate the joint response of the aggregate output...