Optimal monetary policy maximizes the welfare of a representative agent, given frictions in the economic environment. Constructing a model with two sets of frictions -- costly price adjustment by imperfectly competitive firms and costly exchange of wealth for goods -- we find optimal monetary...

Inflation targeting is a monetary policy rule that has implications for both the average performance of an economy and its business cycle behavior. We use a modern, rational expectations model to study the twin effects of this policy rule. The model highlights forward- looking consumption and...

In a plain-vanilla New Keynesian model with two-period staggered price-setting, discretionary monetary policy leads to multiple equilibria. Complementarity between the pricing decisions of forward-looking firms underlies the multiplicity, which is intrinsically dynamic in nature. At each point...

Can nominal contracts make a difference for the neutrality of money if these arise endogenously in general equilibrium? This paper utilizes aversion of Lucas's seminal equilibrium business cycle theory to address this question. However, we depart from Lucas in assuming that (1) agents have...

This paper conducts a modern variant of the test proposed and carried out by Adelman and Adelman (1959). Using the methods developed by Burns and Mitchell (1946). we see if we can distinguish between the economic series generated by an actual economy and those analogous artificial series...

Many kinds of economic behavior appear to be governed by discrete and occasional individual choices. Despite this, econometric partial adjustment models perform relatively well at the aggregate level. Analyzing the classic employment adjustment problem, we show how discrete and occasional...

The Real Business Cycle (RBC) research program has grown spectacularly over the last decade, as its concepts and methods have diffused into mainstream macroeconomics. Yet, there is increasing skepticism that technology shocks are a major source of business fluctuations. This chapter exposits the...

This paper studies the economic role of financial institutions in economies where agents' incomes are subject to privately observable, idiosyncratic random events. The information structure precludes conventional insurance arrangements. However, a financial institution -- perhaps best viewed as...

Why do the countries of the world display considerable disparity in long term growth rates? This paper examines the hypothesis that the answer lies in differences in national public policies which affect the incentives that individuals have to accumulate capital in both its physical and human...

Time-separability of utility means that past work and consumption do not influence current and future tastes. This form of preferences does not restrict the size of intertemporal-substitution effects--notably, we can still have a strong response of labor supply to temporary changes in wages....