Pigouvian Cycles

By Renato Faccini and Leonardo Melosi

American Economic Journal: Macroeconomics, April 2022

Current and expected unemployment rates contain information that is highly useful to estimate the effect of news about TFP and to allow a general equilibrium rational expectations model to generate Pigouvian cycles: a large fraction of the comovement of o...

Effective Demand Failures and the Limits of Monetary Stabilization Policy

By Michael Woodford

American Economic Review, May 2022

The challenge for stabilization policy presented by the COVID-19 pandemic stems above all from disruption of the circular flow of payments, resulting in a failure of what Keynes (1936) calls "effective demand." As a consequence, economic activity in many ...

Book Reviews

Journal of Economic Literature, June 2002

An Analysis of the Literature on International Unconventional Monetary Policy

By Saroj Bhattarai and Christopher J. Neely

Journal of Economic Literature, June 2022

This paper evaluates the literature on international unconventional monetary policies (UMPs). Introducing market segmentation, limits-to-arbitrage, and time-consistent policy in standard models permits a theoretical role for UMP. Empirical studies provide...

Heterogeneous Global Booms and Busts

By Maryam Farboodi and Péter Kondor

American Economic Review, July 2022

We investigate the heterogeneous boom and bust patterns across countries that emerge as a result of global shocks. Our analysis sheds light on the emergence of core and periphery countries, and the joint determination of the depth of recessions and tightn...

Monetary Policy with Opinionated Markets

By Ricardo J. Caballero and Alp Simsek

American Economic Review, July 2022

We build a model in which the Fed and the market disagree about future aggregate demand. The market anticipates monetary policy "mistakes," which affect current demand and induce the Fed to partially accommodate the market's view. The Fed expects to imple...

The Neo-Fisher Effect: Econometric Evidence from Empirical and Optimizing Models

By Martín Uribe

American Economic Journal: Macroeconomics, July 2022

This paper assesses the presence and importance of the neo-Fisher effect in postwar data. It formulates and estimates an empirical and a New Keynesian model driven by stationary and nonstationary monetary and real shocks. In accordance with conventional w...

Reputation, Bailouts, and Interest Rate Spread Dynamics

By Alessandro Dovis and Rishabh Kirpalani

American Economic Journal: Macroeconomics, July 2022

We propose a joint theory for interest rate dynamics and bailout decisions. Interest rate spreads are driven by time-varying fundamentals and expectations of future bailouts. Private agents are uncertain about the government's willingness to bail out and ...

Flexibility and Frictions in Multisector Models

By Jorge Miranda-Pinto and Eric R. Young

American Economic Journal: Macroeconomics, July 2022

We show that during the Great Recession, more-flexible sectors paid lower sectoral bond spreads. We rationalize this fact with a model with input-output linkages, heterogeneous elasticities, and binding working capital constraints in the use of intermedia...

Dynamic Oligopoly and Price Stickiness

By Olivier Wang and Iván Werning

American Economic Review, August 2022

How does market concentration affect the potency of monetary policy? To address this question we embed a dynamic oligopolistic game into a general-equilibrium macroeconomic model. We provide a sufficient-statistic formula for the response to monetary shoc...

Expected and Realized Inflation in Historical Perspective

[Symposium: Inflation Expectations]

By Carola Binder and Rupal Kamdar

Journal of Economic Perspectives, Summer 2022

This paper provides historical context for the relationship between expected and realized inflation. We begin with a discussion of early theoretical thought about how inflation expectations are formed. Then, we discuss survey- and asset-based measures o...

Mind the Gap! Stylized Dynamic Facts and Structural Models

By Fabio Canova and Filippo Ferroni

American Economic Journal: Macroeconomics, October 2022

We study what happens to identified shocks and to dynamic responses when the data generating process features q disturbances but q1 < q variables are used in an empirical model. Identified shocks are linear combinations of current and past valu...

Age Structure and the Impact of Monetary Policy

By John V. Leahy and Aditi Thapar

American Economic Journal: Macroeconomics, October 2022

We exploit cross-sectional variation in the response of US states to an identified monetary policy shock to study how the impact of monetary policy varies with the age structure of the population. We find that the economy's response is weaker the greater ...

Monetary Policy and Liquidity Constraints: Evidence from the Euro Area

By Mattias Almgren, José-Elías Gallegos, John Kramer, and Ricardo Lima

American Economic Journal: Macroeconomics, October 2022

We quantify the relationship between the response of output to monetary policy shocks and the share of liquidity-constrained households. We do so in the context of the euro area, using a Local Projections Instrumental Variables estimation. We construct an...

Neo-Fisherian Policies and Liquidity Traps

By Florin O. Bilbiie

American Economic Journal: Macroeconomics, October 2022

Liquidity traps can be either fundamental or confidence-driven. In a simple, unified New Keynesian framework, I provide the analytical condition for the latter's prevalence: enough shock persistence and endogenous intertemporal amplification of future ("n...

Optimal Public Debt with Life Cycle Motives

By William B. Peterman and Erick Sager

American Economic Journal: Macroeconomics, October 2022

This paper determines optimal public debt in a life cycle model with incomplete markets that matches the empirically observed variation in consumption, labor, and savings. We find that public savings—not public debt—equal to 168 percent of output is o...

Asymmetric Effects of Monetary Policy in Regional Housing Markets

By Knut Are Aastveit and André K. Anundsen

American Economic Journal: Macroeconomics, October 2022

The responsiveness of house prices to monetary policy shocks depends on the nature of the shock—expansionary versus contractionary—and on local housing supply elasticities. These findings are established using a panel of 263 US metropolitan areas. Exp...

Fiscal Histories

[Symposium: The Size of Government Debt]

By John H. Cochrane

Journal of Economic Perspectives, Fall 2022

The fiscal theory states that inflation adjusts so that the real value of government debt equals the present value of real primary surpluses. Monetary policy remains important. The central bank can set an interest rate target, which determines the path of...

Learning about Debt Crises

By Radoslaw Paluszynski

American Economic Journal: Macroeconomics, January 2023

The European debt crisis presents a challenge to our understanding of the relationship between government bond yields and economic fundamentals. I argue that information frictions are an important missing element and support that claim with evidence on th...

Uncovering the Effects of the Zero Lower Bound with an Endogenous Financial Wedge

By Dan Cao, Wenlan Luo, and Guangyu Nie

American Economic Journal: Macroeconomics, January 2023

We study the effects of the zero lower bound (ZLB) on the severity of financial crises using an incomplete markets New Keynesian model with two occasionally binding constraints: a ZLB on the nominal interest rate and a borrowing constraint tied to an asse...