We develop a general equilibrium model of an emerging market economy where productivity growth differentials between tradable and non-tradable sectors result in an equilibrium appreciation of the real exchange rate-the so-called Balassa-Samuelson effect. The paper explores the dynamic properties...

Restaurant prices in the euro area saw an unprecedented increase after the introduction of the euro. We use an extension of commonly used models of sticky prices and argue that the increase in restaurant prices can be explained by menu costs. The extension we use involves the state-dependent...

This paper examines the choice of exchange rate regime in EU candidate countries during the process of accession to the European Monetary Union (EMU). In the presence of real exchange rate appreciation due to the Balassa-Samuelson effect, candidate countries face a trade-off between trend...

Using a stochastic business cycle model of a small open economy we ask how the problem of the optimizing policy-maker changes endogenously as the international trade structure is altered. From input-output data for OECD and emerging market economies, we document that differences in trade across...

We build a business cycle model where employers' screening of heterogeneous workers plays a central role in determining both the flows into and out of unemployment. The model can address how differences between the US and European labor market flows affect business cycle dynamics. It provides a...

negatively correlated, (iii) short-term real interest rates display greater volatility than expected inflation, (iv) nominal interest rates and expected inflation are negatively correlated for short maturities, but positively correlated for long maturities, (v) inflation risk premia are very...

The canonical new Keynesian Phillips Curve has become a standard component of models designed for monetary policy analysis. However, in the basic new Keynesian model, there is no unemployment, all variation in labor input occurs along the intensive hours margin, and the driving variable for...

We argue that a fixed exchange rate can be an optimal choice even if a policy maker could commit to the first-best monetary policy whenever the private sector's beliefs reflect incomplete information about the policy maker's dependability. This model implies that joining a currency area may be...

We show that the credibility gain from permanently committing to a fixed exchange rate by joining the European Monetary Union can outweigh the loss from giving up independent monetary policy if the domestic monetary authority does not enjoy full credibility. Using a DSGE model, this paper shows...

We show that the composition of international trade has important implications for the optimal volatility of the exchange rate, above and beyond the size of trade flows. Using an analytically tractable small open economy model, we characterize the impact of the trade composition on the policy...