In this paper we show that the highly persistent inflation dynamics and its lead-lag relationship with output can be explained by a standard flexible price RBC model augmented with endogenous monetary policy. Endogenous monetary policy acting upon the illusion that price is sticky and money is...

Price rigidity is the key mechanism for propagating business cycles in traditional Keynesian theory. Yet the New Keynesian literature has failed to show that sticky prices by itself can effectively propagate business cycles in general equilibrium. This situation may be a direct consequence of...

This paper constructs an endogenous growth model driven by self-fulfilling expectation shocks to explain the stylized fact that the average growth rate of GDP is related negatively to volatility and positively to capacity utilization. The implied welfare gain from further stabilizing the U.S....

This paper offers a plausible explanation for the close link between oil prices and aggregate macroeconomic performance in the 1970s. Although this link has been well documented in the empirical literature, standard economic models are not able to replicate this link when actual oil prices are...

Labor productivity comoves strongly with output, leads output and employment, and is only weakly correlated with employment. Procyclical productivity is observed in virtually all countries and industries, and it is observed even in periods of fluctuations due to pure demand shocks, such as...

The profession has been longing for closed-form solutions to consumption functions under uncertainty and borrowing constraints. This paper proposes an analytical approach to solving buffer-stock saving models with both idiosyncratic and aggregate uncertainties. It is shown analytically that an...