We reconsider the canonical model of price setting with menu costs by Ball and Romer (1990). Their original model exhibits multiple equilibria for nominal aggregate demand shocks of intermediate size. By abandoning Ball and Romer's (1990) assumption that demand shocks are common knowledge among...

Using the model of Rochet and Vives (2004), this note shows that a prudential regulator can in general not mitigate a bank's failure risk solely by means of liquidity requirements. However, their effectiveness can be restored if, in addition, minimum capital requirements are met. This provides a...

It has recently been argued that intra-eurosystem claims and liabilities in the form of TARGET2 balances would raise fundamental issues within the European monetary union. This article provides a framework for the economic analysis of TARGET2 balances and discusses the key arguments behind this...

We derive recursive representations of nonlinear moving average (NLMA) perturbations of DSGE models. As the stability of higher order NLMA representations follows directly from stability at first order, these recursive representations provide rigorous support for the practice of pruning that is...

We analyze the theoretical moments of a nonlinear approximation to a model of business cycles and asset pricing with stochastic volatility and recursive preferences. We find that heteroskedastic volatility operationalizes a time-varying risk adjustment channel that induces variability in...

A solution method is derived in this paper for solving a system of linear rational-expectations equation with lagged expectations (e.g., models incorporating sticky information) using the method of undetermined coefficients for the infinite MA representation. The method applies a combination of...

The uniqueness of bounded local equilibria under interest rate rules is analyzed in a model with sticky information à la Mankiw and Reis (2002). The main results are tighter bounds on monetary policy than in sticky-price models, irrelevance of the degree of output-gap targeting for determinacy,...

Imposing the natural rate hypothesis (NRH) can dramatically alter the determinacy bounds on monetary policy by closing the output gap in the long run. I show that the hypothesis eliminates any role for the output gap in determinacy and renders the conditions for determinacy identical for all...

I construct risk-corrected approximations of the policy functions of DSGEmodels around the stochastic steady state and ergodic mean that are linear in the state variables. The resulting approximations are uniformly more accurate than standard linear approximations and capture the dynamics of...

The Reversible Jump Markov Chain Monte Carlo (RJMCMC) method can enhance Bayesian DSGE estimation by sampling from a posterior distribution spanning potentially nonnested models with parameter spaces of different dimensionality. We use the method to jointly sample from an ARMA process of unknown...