We study how monetary policy should respond to shocks which permanently alter the steady state structure of the economy. In such a case monetary policy affects not only the short run misallocations due to nominal rigidities, but also relative prices which stimulate reallocation of capital. We...

What drives the recent inflation surge? To answer this question, one must decompose inflation fluctuations into the contribution of structural shocks. We document how whimsical such a historical shock decomposition can be in standard vector autoregressive (VAR) models. We show that the...

An apparent disconnect has taken place between inflation and economic activity in the US over the last 25 years, with price inflation remaining remarkably stable in spite of large fluctuations in the output gap and other measures of economic slack. This observation has led some to believe that...

Existing DSGE models are not able to reproduce the observed influence of international business cycles on small open economies. We construct a two-sector New Keynesian model to address this puzzle. The set-up takes into account intermediate trade and producer heterogeneity, where goods and...

How and to what extent are small open economies affected by international shocks? I develop and estimate a medium scale DSGE model that addresses both questions. The model incorporates i) international markets for firm-to-firm trade in production inputs, and ii) producer heterogeneity where...

The recent oil price fall has created concern among policy makers regarding the consequences of terms of trade shocks for resource-rich countries. This concern is not a minor one - the world's commodity exporters combined are responsible for 15-20% of global value added. We estimate a...

We estimate a structural vector autoregressive model in order to quantify four main explanations for the decline of the US labor income share: (i) rising market power of firms, (ii) falling market power of workers, (iii) higher investmentspecific technology growth, and (iv) the widespread...

Should central banks use leaning against the wind (LAW)-type monetary or macroprudential policy to address risks to financial stability? We first assess LAW as a one-off (nonsystematic) policy using an estimated large-scale dynamic stochastic general equilibrium (DSGE) model with empirically...

We provide a theory on how a wider foreign lending base of local-currency sovereign debt may lead to destabilising effects (the original sin redux). Bond sell-offs by foreigners induce domestic banks to fund the government, reducing the credit for investment and tightening financial conditions....

Most economic decisions involve judgments. When decisions are taken collectively, various judgment aggregation problems may occur. Here we consider an aggregation problem called the discursive dilemma , which is characterized by an inconsistency between the aggregate judgment on the premises for...