We use the limited participation model of money as a laboratory for studying the operating characteristics of Taylor rules for setting the rate of interest. Rules are evaluated according to their ability to protect the economy from bad outcomes such as the burst of in°ation observed in the 1970s. Based on our analysis, we argue for a rule which: (i) raises the nominal interest rate more than on...

We use Bayesian time-varying parameters VARs with stochastic volatility to investigate changes in the marginal predictive content of the yield spread for output growth in the United States and the United Kingdom, since the Gold Standard era, and in the Eurozone, Canada, and Australia over the post-WWII period. Overall, our evidence does not provide much support for either of the two dominant ex...

We show that reputational effects may explain differences in economic performances of dictatorial or authoritarian governments. A good reputation convinces citizens that the dictator will exert high effort in economic performance. With replacement, a dictator exerts high effort only if its foregone rent is not too large. Without replacement, the dictator succeeds in convincing the citizens of i...

This paper employs an unobserved component model that incorporates a set of economic fundamentals to obtain the Euro-Dollar permanent equilibrium exchange rates (PEER) for the period 1975Q1 to 2008Q4. The results show that for most of the sample period, the Euro-Dollar exchange rate closely followed the values implied by the PEER. The only significant deviations from the PEER occurred in the ye...

We evaluate predictive regressions that explicitly consider the time-variation of coefficients in a comprehensive Bayesian framework. This allows for fast and consistent adjustment of regression coefficients to changes in the underlying economic relationships (e.g., changes in the regulatory environment) as we document explicitly for the coefficient of the dividend yield. For monthly returns of...

Woodford (2007) argues that it is not appropriate to regard inflation in the steady state of New Keynesian models as determined by steady-state money growth. Woodford instead argues that the intercept term in the monetary authority’s interest-rate policy rule determines steady-state inflation. In this paper, I offer an alternative interpretation of steady-state behavior, according to which it i...

Differential tax analysis is used to show how the socially optimal fiscal-tax to liquidity-tax ratio changes with the relative size of the tax-evading hidden economy. The smaller the relative size of the hidden economy, the larger the optimal fiscal-tax to liquidity-tax ratio. The empirical cross-section and panel evidence supports this theoretical result. JEL: E31, E52, H21, O17

This paper develops a tractable dynamic term structure models under jump-diffusion and regime shifts with time varying transition probabilities. The model allows for regime-dependent jumps while both jump risk and regime-switching risk are priced. Closed form solution for the term structure is obtained for an affine-type model under loglinear approximation. JEL Classification: G12, E43, E52

In this paper we propose straightforward extensions of multi-union, monopolistic competition models appearing in the recent literature on the macroeconomic effects of monetary policy. We extend these models from the Stackelberg equilibrium to the Nash equilibrium under variations in labor market regime in order to evaluate propositions about non-neutrality of monetary policy. JEL Classification...

In both estimation and calibration studies, the notion of ergodicity plays a fundamental role, permitting time series averages to be regarded as approximations to population means. As it turns out, many economic models routinely used for quantitative modeling do not satisfy the classical ergodicity conditions. In this paper we develop a new set of ergodicity conditions orientated towards econom...