Does Ramsey optimal policy call for adjusting the inflation target by the size of the quality bias in measured inflation? We find that if it is nonhedonic (or sticker) prices that are sticky, the conventional view, according to which it is optimal to adjust the inflation target upward by the...

Using panel structural VAR analysis and quarterly data from four industrialized countries, we document that an increase in government purchases raises output and private consumption, deteriorates the trade balance, and depreciates the real exchange rate. This pattern of comovement poses a puzzle...

This paper investigates whether the international globalization of financial markets allows for significant cross-country risk-sharing at the business cycle frequency. We find that cross-country risk-sharing is still limited and this is unlikely to be the result of financial frictions that limit...

Financial innovation and overconfidence about the risk of new financial products were key factors behind the 2008 U.S. credit crisis. We show that a model with a collateral constraint in which learning about the risk of a new financial environment interacts with Fisherian amplification produces...