We study optimal time-consistent monetary and fiscal policy in a New Keynesian model where occasional declines agents’ confidence give rise to persistent liquidity trap episodes. Insights from widely studied fundamental-driven traps are not useful guide for enhancing welfare this model. Raising the inflation target, appointing an inflation-conservative central banker, or allowing use of governm...

This paper combines a data-rich environment with machine learning algorithm to provide new estimates of time-varying systematic expectational errors (“belief distortions”) embedded in survey responses. We find sizable distortions even for professional forecasters, all respondent-types overweighting the implicit judgmental component their forecasts relative what can be learned from publicly avai...

This paper assesses the presence and importance of neo-Fisher effect in postwar data. It formulates estimates an empirical a New Keynesian model driven by stationary nonstationary monetary real shocks. In accordance with conventional wisdom, temporary increases nominal interest rate are estimated to cause decreases inflation output. The main finding is that permanent shocks increase long run ra...

We study what happens to identified shocks and dynamic responses when the data generating process features q disturbances but 1 < variables are used in an empirical model. Identified linear combinations of current past values all structural do not necessarily combine same type. Theory-based restrictions may be insufficient obtain dynamics. revisit evidence regarding transmission house price ...

abstract the purpose of this paper is to test the hypothesis first proposed by romer (1993); suggesting that inflation is lower in more open economies. according to this hypothesis, central banks have a lower incentive to engineer surprise inflations in more-open economies because the phillips curve is steeper. furthermore, comparing with other empirical studies, this paper has used the new kof...

Existing estimates of the Federal Reserve’s implicit inflation target typically rely on the assumption that it is constant for the duration of the period of analysis. This paper relaxes this assumption and estimates the implicit inflation target using a time-varying parameter model and the Kalman filter. In applying this method to the Volcker–Greenspan period, it finds significant time variatio...

This study examines the expectational stability of the rational expectations equilibria (REE) under alternative Taylor rules when trend inflation is non-zero. We find that when trend inflation is high, the REE is likely to be expectationally unstable. This result holds true regardless of the nature of the data (such as contemporaneous data, forecast, and lagged data) introduced in the Taylor ru...

Evidence on the portfolio holdings and transaction patterns of households suggests that the burden of inflation is not evenly distributed. We build a monetary growth model consistent with key features of cross-sectional household data and use this framework to study the distributional impact of inflation. At the aggregate level, our model economy behaves similar to standard monetary growth mode...

We analyze a monetary model with flexible labor supply, cash-inadvance constraints, and seigniorageand tax-financed government spending. If the intertemporal elasticity of substitution of labor is greater than one, both determinate and indeterminate steady states exist. If the elasticity is less than one, there is a unique steady state, which can be indeterminate. Only in the latter case do the...

We examine the nonlinear one-step forward-looking model, in which the current state is a function of the (subjective) expected value of a nonlinear function of the state next period. Stationary Markov Sunspot Equilibria (SSEs) are known to exist near an indeterminate steady state, i.e. when the derivative of the function at the steady state is bigger than one in absolute value. We show that the...