Some, but less than intended. The reason is a shift in the behavior of the private sector: Prices adjust more frequently, lowering the potency of monetary policy. We quantitatively investigate this channel across different models, based on a calibration using micro data. By raising the target...

This paper argues that, with a flat Phillips curve, welfare can be improved if the Central Bank stabilizes the output gap directly. The pursuit of price stability may, in fact, increase price stickiness, flatten the Phillips curve further, increase the distortions due to sticky prices, and lead...

When financial intermediaries’ key characteristic is provision of liquidity through their liabilities, with financial frictions the financial sector in the aggregate is likely to over-accumulate equity, thus decreasing liquidity provision and household welfare. Aggregate household welfare is...

Digital currencies provide a potential form of liquidity competing with bank deposits. We introduce stable digital currency into a macro model with a financial sector in which financial frictions generate endogenous systemic risk and instability. In the model, digital currency is fully...

Monetary policy can promote financial stability and improve household welfare. We con- sider a macro model with a financial sector in which banks do not actively issue equity, output and growth depend on the aggregate level of bank equity, and equilibrium is inefficient. Monetary policy rules...