A dynamic general equilibrium model to study the relationship between monetary policy and movements in risk is developed. Variation in risk arises because households face fixed costs of transferring cash across financial accounts, implying that some households rebalance their portfolios...

Asset prices and the equity premium might reflect doubts and pessimism. Introducing these features in an otherwise standard New-Keynesian model changes optimal policy in a substantial way. There are three main results: (i) asset-price movements improve the inflation-output trade-off so that...

Macroeconometric equivalence means that estimates of DSGE models using first-order approximations to equilibrium conditions fail to distinguish between alternative preference/technology configurations. Microeconomic dissonance means that the underlying microeconomic differences between...