This paper examines optimal monetary policy in a New Keynesian model where supply and demand shocks affect the price of oil. Optimal policy fully stabilizes core inflation when wages are flexible. The nominal rate rises (falls) in response to the demand (supply) shock. With sticky wages core...

The existing literature holds that the Taylor principle often leads to indeterminacy in New Keynesian models that allow for capital accumulation and limited asset market participation. This conclusion is special, however, to the case of continuous full employment. When the assumption of perfect...

New Keynesian models with limited asset market participation assert that under plausible conditions higher real interest rates increase aggregate demand, the Taylor principle leads to indeterminacy, and passive policy ensures a unique equilibrium. These striking results stem from the assumption...

In a forward-looking business cycle model, central banks can achieve the (timeless)optimal commitment equilibrium even in the absence of a commitment technology, if they are delegated with an objective function that is different from the societal one. The paper develops a general...

Both real and monetary macro models have parallely exploited the potential for various preferences in accounting for empirical facts. This paper brings the two literatures together by estimating time non-separable preferences with habit formation in consumption that nests several commonly used...

This paper revisits the phenomenon of stagflation. Using a standard New Keynesian dynamic, stochastic general equilibrium model, we show that stagflation from monetary policy alone is a very common occurrence when the economy is subject to both deviations from the policy rule and a drifting...

Empirical and experimental evidence documents that money illusion is persistent and widespread. This paper incorporates money illusion into a stochastic continuous-time monetary model of endogenous growth. We model an agent's money illusion behavior by assuming that he maximizes nonstandard...

This note discusses Lee Ohanian׳s paper on “Monetary policy in the midst of big shocks”. In particular, it asks what would happen if assumptions are changed so inflation have redistribution effects. Evidence on nominal positions suggests that such effects can be quantitatively important.