The development of a real business cycle model in which government fiscal variables such as tax rates and public expenditures are endogenous. The authors characterize the "optimal" behavior of these policy variables over the business cycle and relate this behavior to movements in private-sector...

Since the third quarter of 2000, the U.S. economy began to experience a slowdown in its rate of growth. This slowdown serves as a reminder that the business cycle is still alive and raises the following questions: What do we know about the driving forces behind the business cycle? What should...

Empirical estimates of the Federal Reserve's policy rule typically find that the regression coefficient on the lagged federal funds rate is around 0.8 and strongly significant. One economic interpretation of this result is that the Fed intentionally "smoothes" interest rates, i.e., policymakers...

We develop a simple, quantitative model of the U.S. economy to demonstrate how an "inflation scare " may occur when the Federal Reserve lacks full credibility. In particular, we show that the long-term nominal interest rate may undergo a sudden increase if an adverse movement in the inflation...

A study of the welfare implications of some basic structural features of the U.S. tax code, including the tax deductibility of depreciation and the practice of taxing labor income differently than capital income. The results show that long-run welfare and output can be improved by a policy of...