This paper presents a DSGE model in which agents׳ learning about the economy can endogenously generate time-varying macroeconomic volatility. Economic agents use simple models to form expectations and need to learn the relevant parameters. Their gain coefficient is endogenous and is adjusted...

This paper characterizes long-run and short-run optimal fiscal policy in the labor selection framework. In a calibrated non-Ramsey decentralized equilibrium, labor market volatility is inefficient. Keeping fixed the structural parameters, the Ramsey government achieves efficient labor market...

This paper studies the equilibrium determinacy properties of a simple interest rate rule in a small open economy subject to currency substitution (i.e., the use of a foreign currency for domestic transactions) and risk premia on foreign borrowing. It shows that if currencies are substitute in...

As recent experience suggests, the most significant economic fluctuations are those that combine real and financial factors. This paper works out a simple model that couples a version of Goodwin׳s (1967) growth cycle model of real fluctuations with insights drawn from a model of financial...

The efficacy of central bank communications is inextricably linked to the characteristics of the monetary policy framework. Therefore, this paper presents a set of fundamental principles regarding the joint design of monetary policy strategy and communications. The practical implications of...

Wide operational and financial independence given to monetary and credit policies subjects the Federal Reserve to incentives detrimental for macroeconomic and financial stability. The absence of a monetary policy rule created go-stop incentives that produced inefficient volatility of both...

The term premium has become increasingly important in discussions of monetary policy formulation. This paper reviews two approaches to embedding a variable term premium into an otherwise standard modern DSGE model. The first approach maintains frictionless asset trade but alters preferences so...

Does a change in the public׳s holdings of government debt affect the term structure of interest rates? Empirical analysis using a VAR model indicates that a rise in these holdings of the real debt-to-GDP ratio increases both the three-month and ten-year U.S. nominal yields in a statistically...

Following the bankruptcy of Lehman Brothers, interbank borrowing and lending dropped, whereas reserve holdings of depository institutions skyrocketed, as the Fed injected liquidity into the U.S. banking sector. This paper introduces bank liquidity risk and limited market participation into a...

We provide an extensive analysis of the predictive ability of financial volatility for economic activity. We consider monthly measures of realized and implied volatility from the stock and bond markets. In a dynamic factor framework, we extract the common long-run component of volatility that is...