We evaluate the response of perceived tail risks in financial markets to the implementation of unconventional monetary policy by the U.S. Federal Reserve. Using information from out-of-money equity index options, we find that perceived risks decline significantly in response to both policy announcements and actual asset purchases. The announcement effects are strongest specifically for downside...

The remarkable stability of low domestic inflation in many countries requires explanation. In this paper, a number of competing hypotheses are evaluated on a stand-alone basis, and all are found to be inadequate. This includes the view that this outcome has been solely the result of more effective disinflationary monetary policies. However, a combination of these hypotheses (including a signifi...

Economists long considered money illusion to be largely irrelevant. Here we show, however, that money illusion has powerful effects on equilibrium selection. If we represent payoffs in nominal terms, choices converge to the Pareto inefficient equilibrium; however, if we lift the veil of money by representing payoffs in real terms, the Pareto efficient equilibrium is selected. We also show that ...

It is well known that increasing returns to scale and firms’ market power are two potential sources of sunspot expectations in Neoclassical models. In this paper we show that both the degree of returns to scale and market power can have fundamentally different implications for self-fulfilling expectations in New Keynesian models depending on the nature of price rigidity. As a result, the design...

Despite its important role in macroeconomics and finance, the expectations hypothesis (EH) of the term structure of interest rates has received little empirical support. While the EH’s poor performance has been attributed to a variety of sources, none appear to account for the EH’s poor performance. Recent evidence (Diebold and Li, 2003; Duffee, 2002; and Carriero, et al., 2003) suggests the po...

Output-growth and inflation differentials have been large and rather persistent since the beginning of the European Economic and Monetary Union. In the empirical literature, several fundamental causes of heterogeneities as regional productivity shocks and home-bias effects, and frictions as staggered-pricing and labor immobility are identified as causes for these differentials. In our model, we...

This paper investigates the disinflation experiences of three countries, Australia, Canada and New Zealand. Unlike previous approaches which have sought to use institutional data to pre-determine the causes, speed and duration of the transitions to low inflation regimes this paper allows price data itself to determine the speed and timing of the reforms using smooth transition analysis. The res...

Financial Globalization and Monetary Policy* The process of financial globalization has significantly altered the environment in which national monetary policy authorities operate. What implications does this have for the design of monetary policy? The question can be properly addressed only in the context of a model where monetary policy interacts with financial market efficiency. This paper i...

The paper evaluates the distributional effects of conventional and unconventional monetary policies for the USA. The distributional effects are evaluated for the overall impact on the income distribution, using Gini index. The paper also assesses the effects of conventional and unconventional monetary policies on the different parts of income distribution, employing corresponding percentile rat...

Changes in monetary policy are typically implemented gradually, an empirical observation known as interest-rate smoothing. We propose the explanation that timenon-separable preferences may render interest-rate smoothing optimal. We find that when consumers have “catching-up-with-the-Joneses” preferences, optimal monetary policy reacts gradually to shocks to prevent inefficiently fast adjustment...