Inflation is determined by interaction between real factors and monetary policy. Among the most important real factors are shocks to the supply and demand for different components of the consumption basket. We use an estimated multi-sector New Keynesian model to decompose the behavior of U.S....

Optimal monetary policy maximizes welfare, given frictions in the economic environment. Constructing a model with two sets of frictions - the Keynesian friction of costly price adjustment by imperfectly competitive firms and the Monetarist friction of costly exchange of wealth for goods - we...

We study discretionary equilibrium in the Calvo pricing model for a monetary authority that chooses the money supply. The steady-state inflation rate is above 8 percent for a baseline calibration, but it varies substantially with alternative structural parameter values. If the initial condition...

This paper uses transaction-level data from a large discount chain together with zip-code-level explanatory variables to learn about consumer payment choices across size of transaction, location, and time. With three years of data from thousands of stores across the country, we identify...

Bank reserves in the United States increased dramatically at the end of 2008. Subsequent asset purchase programs in 2009 and 2011 more than doubled the quantity of reserves outstanding. These events required major adjustments in banks' balance sheets. We study the evolution of reserve holdings...

The relative prices of different categories of consumption goods have been trending over time. Assuming they are exogenous with respect to monetary policy, these trends imply that monetary policy cannot stabilize the prices of all consumption categories. If prices are sticky, monetary policy...

A discretionary policymaker responds to the state of the economy each period. Private agents' current behavior determines the future state based on expectations of future policy. Discretionary policy thus can lead to dynamic complementarity between private agents and a policymaker, which in turn...

This paper investigates the ability of a region participating in a currency union to affect its inflation differential with respect to the union through fiscal policy. We study the interaction between regional fiscal policy and inflation differentials in a flexible-price, two-region model with...

If monetary policy succeeds in keeping average inflation very low, nominal interest rates may occasionally be constrained by the zero lower bound. The degree to which this constraint has real implications depends on the monetary policy feedback rule and the structure of price-setting. Policy...

In a canonical staggered pricing model, monetary discretion leads to multiple private sector equilibria. The basis for multiplicity is a form of policy complementarity. Specifically, prices set in the current period embed expectations about future policy, and actual future policy responds to...