As the nominal interest rate cannot fall below zero, a central bank with imperfect credibility faces a significant challenge to stabilize the economy in a New Keynesian model during a large recession. We characterize the optimal monetary policy at the zero lower bound for the nominal interest...

In a stylized DSGE model with an energy sector, the optimal policy response to an adverse energy supply shock implies a rise in core inflation, a larger rise in headline inflation, and a decline in wage inflation. The optimal policy is well approximated by policies that stabilize the output gap,...

Cross-country income gaps are large in the data. Can observed investment prices account for these gaps? Our model adds an extensive margin to the neoclassical growth model by allowing for entry of firms. When combined with a “returns to variety” effect, our model provides an amplification...

Insurance schemes rely on legal consequences to deter fraud and tax evasion. This observation guides us to introduce random state verification in a dynamic economy with private information. With some probability, an agent's skill becomes known to the planner who prescribes punishments to...