We analyze monetary policy in a model where temporary shocks can permanently scar the economy's productive capacity. Unemployed workers' skill losses generate multiple steady-state unemployment rates. When monetary policy is constrained by the zero bound, large shocks reduce hiring to a point...

We show that sentiments - self-fulfilling changes in beliefs that are orthogonal to fundamentals - can drive persistent aggregate fluctuations under rational expectations. Such fluctuations can occur even in the absence of any exogenous aggregate fundamental shocks. In addition, sentiments also...

We characterize the entire set of linear equilibria of beauty contest games under general information structures. In particular, we focus on equilibria in which sentiments, that is self-fulfilling changes in beliefs that are orthogonal to fundamentals and exogenous noise, can drive aggregate...

We show that sentiments - self-fulfilling changes in beliefs that are orthogonal to fundamentals - can drive persistent aggregate fluctuations under rational expectations in a beauty contest game. Such fluctuations can occur even in the absence of exogenous aggregate fundamental shocks....

We show that in Heterogeneous-Agent New-Keynesian (HANK) economies with countercyclical risk the natural interest rate is endogenous and co-moves with output, leaving the economy susceptible to self-fulfilling fluctuations. Unlike in Representative-Agent New-Keynesian models, the Taylor...

We provide an information-based theory of matching efficiency fluctuations. Rationally inattentive firms have limited capacity to process information and cannot perfectly identify suitable applicants. During recessions, higher losses from hiring unsuitable workers cause firms to be more...