We develop a small open economy macroeconomic model where financial conditions influence aggregate behavior. We use this model to explore the connection between the exchange rate regime and financial distress. Fixed exchange rates are shown to exacerbate financial crises. Quantitative exercises...

We develop and estimate a medium scale macroeconomic model that allows for unemployment and staggered nominal wage contracting. In contrast to most existing quantitative models, employment adjustment is on the extensive margain and the employment of existing workers is efficient. Wage rigidity,...

We develop an analytically tractable Phillips curve based on state-dependent pricing. We differ from the existing literature by considering a local approximation around a zero inflation steady state and introducing idiosyncratic shocks. The resulting Phillips curve is a simple variation of the...

This paper attempts to provide a step towards understanding the role of financial intermediaries (quot;banksquot;) in aggregate economic activity. We first develop a model of the intermediary sector which is highly simplified, but rich enough to motivate several special features of bauks. Of...

This paper pinpoints sources of recent problems in U.S. commercial banking. The objective is to provide a context for evaluating policy options. There are three parts. The first documents how increased competition and financial innovation made banking less stable in the 1980s. The second part...

Is corporate leverage excessive? Is the tax code distorting corporate capital structure decisions in a way that increases the possibility of an economic crisis owing to quot;financial instabilityquot;?Answering these kinds of questions first requires some precision in terminology. In this paper,...

Adverse shocks to the economy may be amplified by worsening credit-market conditions--the quot;financial accelerator.quot; Theoretically, we interpret the financial accelerator as resulting from endogenous changes over the business cycle in the agency costs of lending. An implication of the...

This paper characterizes a multi-period production economy in which borrowers and lenders enter long-term financial contracts. A key feature is that aggregate production and borrowers' capacity to absorb debt -- their quot;financial capacityquot; - are jointly determined endogenous variables, in...