We construct a model that captures New Monetarist ideas in order to explain post-Great Recession observations on inflation, nominal interest rates, and real interest rates. When finance constraints bind, the model can deliver low real interest rates and positive rates of inflation at the zero lower bound. Optimal monetary policy in the face of a financial crisis shock implies a positive nominal...

Banking crises are fairly ubiquitous events with large adverse consequences. This paper studies the potential for banking crises and their effects on exchange rate policies in a microfounded general equilibrium dynamic model in the tradition of Diamond and Dybvig (1983) and Chang and Velasco (2000). More specifically, we produce a small open economy pure exchange overlapping generations model w...

This paper studies a quantitative dynamic-optimizing business cycle model of a small open economy with staggered price and wage setting. The model exhibits exchange rate overshooting in response to money supply shocks. The predicted variability of the nominal and, especially, of the real exchange rate is noticeably higher than in standard Real Business Cycle models with flexible prices and wage...

In this paper, we consider a model in which spatial separation and limited communication create a transactions role for currency, and in which aggregate uncertainty associated with agents’ patterns of movement, creates a role for banks and allows the possibility of banking failures. We show that banks provide complete insurance in states of the world where there are no banking failures and that...