In this study, we perform a quantitative assessment of the role of money as an indicator variable for monetary policy in the euro area. We document the magnitude of revisions to euro area-wide data on output, prices, and money, and find that monetary aggregates have a potentially significant role in providing information about current real output. We then proceed to analyze the information cont...

What are the economic effects of an interest rate cut when an economy is in the midst of a financial crisis? Under what conditions will a cut stimulate output and employment, and raise welfare? Under what conditions will a cut have the opposite effects? We answer these questions in a general class of open economy models, where a financial crisis is modelled as a time when collateral constraints...

Standard real business cycle theory predicts that consumption should be smoother than output, as observed in developed countries. In emerging economies, however, consumption is more volatile than income. In this paper we provide a novel explanation of this phenomenon, the ‘consumption volatility puzzle’, based on political frictions. We develop a dynamic stochastic political economy model where...

          The aim of this paper is to simulate the effects of some macroeconomic policy tools on production and inflation of Iran by the current worldwide financial and real crisis. The theoretical framework of the analysis is based on the so-called ‘IMF/World Bank Integrated Model’ which is the synthesis (a merger) of the basic monetary approach of the Balance of Payments used at t...

Two standard schemes for awarding a prize have been examined in the literature. The prize is awarded (πD) deterministically: to the contestant with the highest output; (πP ) probabilistically: to all contestants, with probabilities proportional to their outputs. Our main result is that if there is suffi cient diversity in contestants’skills, and not too much noise on output, then πP will elicit...

Recent sovereign defaults in emerging countries are accompanied by interest rate spikes and deep recessions. This paper develops a small open economy model to study default risk and its interaction with output, consumption, and foreign debt. Default probabilities and interest rates depend on incentives for repayment. Default occurs in equilibrium because asset markets are incomplete. The model ...

Advanced statistical techniques are used to analyze Hong Kong output dynamics. Hong Kong, Japan and the U.S. are found to share some common long-term and short-term cyclical variations. While the Hong Kong economy is susceptible to external shocks and Granger-caused by the other two economies, local factors account for a large proportion of output growth variability and are mainly responsible f...

What accounts for the significant real effects of monetary policy shocks? And what accounts for the persistent and hump shaped responses of output and inflation in response to such shocks? These questions are investigated in a model that incorporates labor market search, habit persistence, sticky prices, and policy inertia. While habit persistence and price stickiness are important for the hump...

This paper introduces the rational inattention hypothesis (RI) – that agents process information subject to finite channel constraints – into a stochastic growth model with permanent technology shocks. We find that RI raises consumption volatility relative to output by introducing an endogenous demand shock. Furthermore, it is shown that incorporating RI can provide an additional internal propa...

In this paper a stochastic dynamic general equilibrium (DGE) model with capital accumulation is augmented by sticky wages. Wages are set in a staggered way as in Taylor (1980) implying that the optimal wage will be set for two periods. Prices are also sticky since there are adjustments cost of prices as in Rotemberg (1982). It is confirmed that wage staggering has a higher potential to generate...