We investigate how real-time parameter learning, optimal policies and the volatility of exogenous shocks affect the policymakers’ ability to distinguish across competing models of the economy. The detection speed of model misspecification depends only on the relative volatility of supply and...

Starting in the mid 1980s, the level and volatility of inflation decreased across industrial countries. The inflation stabilization can be explained by a shift in monetary policy or by a lucky period of low volatility in business cycle shocks. To test the "good luck hypothesis", we examine the...

We show that limited wage flexibility in economic downturns generates strong and state-dependent amplification of uncertainty shocks. It also explains the cyclical behavior of empirical measures of uncertainty. Central to our analysis is the existence of matching frictions in the labor market...

We show that limited wage flexibility in economic downturns generates strong and state-dependent amplification of uncertainty shocks. It also explains the cyclical behavior of empirical measures of uncertainty. Central to our analysis is the existence of matching frictions in the labor market...