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Working Paper
DSGE models for monetary policy analysis
Monetary DSGE models are widely used because they fit the data well and can be used to address important monetary policy questions. We provide a selective review of these developments. Policy analysis with DSGE models requires using data to assign numerical values to model parameters. The paper describes and implements Bayesian moment matching and impulse response matching procedures for this purpose.
Working Paper
Rational expectations, hyperinflation, and the demand for money
This paper shows how to derive the family of models in which Cagan?s model of hyperinflation is a rational expectations model. The slope parameter in Cagan?s portfolio balance equation is identified in some of these models and in others it is not?a fact which clarifies results obtained in several recent papers.
Working Paper
The expectations trap hypothesis
The authors examine the inflation take-off of the early 1970s in terms of the expectations trap hypothesis, according to which fear of violating the public?s inflation expectations pushed the Fed into producing high inflation. This interpretation is compared with the Phillips curve hypothesis, according to which the Fed produced high inflation as the unfortunate byproduct of a conscious decision to jump-start a weak economy. Which hypothesis is more plausible has important implications for what should be done to prevent future inflation flare-ups.
Working Paper
Sticky price and limited participation models of money: a comparison
We provide new evidence that models of the monetary transmission mechanism should be consistent with at least the following facts. After a contractionary monetary policy shock, the aggregate price level responds very little, aggregate output falls, interest rates initially rise, real wages decline by a modest amount, and profits fall. We compare the ability of sticky price and limited participation models with frictionless labor markets to account for these facts. The key failing of the sticky price model lies in its conterfactual implications for profits. The limited participation model can ...
Working Paper
Nominal rigidities and the dynamic effects of a shock to monetary policy
We present a model embodying moderate amounts of nominal rigidities which accounts for the observed inertia in inflation and persistence in output. The key features of our model are those that prevent a sharp rise in marginal costs after an expansionary shock to monetary policy. Of these features, the most important are staggered wage contracts of average duration three quarters, and variable capital utilization.