The Federal Reserve’s (Fed’s) objective, namely, its dovish stance, is often blamed for the so-called Great Inflation. A popular proxy for the former is constructed using the inflation coefficients in estimated Taylor rules. However, for a welfare-optimizing central bank, the estimated...

Conventional wisdom regards a reduced aggregate noise as welfare improving. This study demonstrates that increased transparency regarding the unobserved state of the economy may reduce social welfare owing to the presence of nominal rigidity. On the one hand, costly business cycle fluctuations...

The Optimal Price Index (OPI) stabilization policy traditionally assigns greater importance to stabilize prices in sectors with stickier prices based on multi-sector models with full information or exogenous information frictions. The current paper challenges this prevailing policy prescription...

The introduction of digital price tags and online shopping may facilitate price adjustments and reduce the degree of nominal rigidity in the economy. Is this welfare-improving? We address this question in a multi-sector New Keynesian model with information frictions and dispersed beliefs....

Monetary policy shocks affect interest rates at long horizons (10 years or more). Furthermore, the private sector's real GDP forecasts are revised upward in response to a monetary tightening. These facts challenge the prevailing theories in academic and policy circles. In this paper, I propose a...

Canonical macroeconomic and financial models require credit to be equal to its fundamental component, i.e., the net present value of the net flows to creditors. Per this conventional view, credit booms are expected to precede increased flows to creditors. However, data suggests otherwise. To...