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Author:Schmitt-Grohe, Stephanie 

Working Paper
Comparing four models of aggregate fluctuations due to self-fulfilling expectations

Finance and Economics Discussion Series , Paper 95-17

Working Paper
A model of the Twin Ds: optimal default and devaluation

This paper characterizes jointly optimal default and exchange-rate policy in a small open economy with limited enforcement of debt contracts and downward nominal wage rigidity. Under optimal policy, default occurs during contractions and is accompanied by large devaluations. The latter inflate away real wages, thereby avoiding massive unemployment. Thus, the Twin Ds phenomenon emerges endogenously as the optimal outcome. In contrast, under fixed exchange rates, optimal default takes place in the context of large involuntary unemployment. Fixed-exchange-rate economies are shown to have ...
FRB Atlanta CQER Working Paper , Paper 2015-1

Working Paper
Price level determinacy and monetary policy under a balanced-budget requirement

This paper analyzes the implications of a balanced budget fiscal policy rule for the determinacy of the price level in a cash-in-advance economy under three alternative monetary policy regimes. It shows that, in such stylized models with flexible prices and a period-by-period balanced budget requirement, the price level is determinate under a money growth rate peg and is indeterminate under a pure nominal interest rate peg. Under a feedback rule whereby the nominal interest rate is set as an increasing function of the inflation rate, the price level is determinate for intermediate values of ...
Finance and Economics Discussion Series , Paper 1997-17

Working Paper
Optimal simple and implementable monetary and fiscal rules

This paper computes welfare-maximizing monetary and fiscal policy rules in a real business cycle model augmented with sticky prices, a demand for money, taxation, and stochastic government consumption. We consider simple feedback rules whereby the nominal interest rate is set as a function of output and inflation and taxes are set as a function of total government liabilities. We implement a second-order accurate solution to the model. We have several main findings. First, the size of the inflation coefficient in the interest rate rule plays a minor role for welfare. It matters only insofar ...
FRB Atlanta Working Paper , Paper 2007-24

Journal Article
Policy implications of the New Keynesian Phillips curve

This article surveys recent advancements in the theory of optimal monetary policy in models with a New Keynesian Phillips curve. It identifies four policy implications. First, near price stability is optimal. Second, simple interest rate feedback rules that respond aggressively to price inflation deliver near-optimal equilibrium allocations. Third, interest rate rules that respond to deviations of output from trend may carry significant welfare costs. Fourth, the zero bound on nominal interest rates does not appear to be a significant obstacle for the actual implementation of low and stable ...
Economic Quarterly , Volume 94 , Issue Fall , Pages 435-465

Working Paper
Balanced-budget rules, distortionary taxes, and aggregate instability

Finance and Economics Discussion Series , Paper 95-44

Working Paper
Backward-looking interest-rate rules, interest-rate smoothing, and macroeconomic instability

The existing literature on the stabilizing properties of interest-rate feedback rules has stressed the perils of linking interest rates to forecasts of future inflation. Such rules have been found to give rise to aggregate fluctuations due to self-fulfilling expectations. In response to this concern, a growing literature has focused on the stabilizing properties of interest-rate rules whereby the central bank responds to a measure of past inflation. The consensus view that has emerged is that backward-looking rules contribute to protecting the economy from embarking on expectations-driven ...
Working Papers , Paper 03-4

Journal Article
Commentary on Inflation targeting and optimal monetary policy

Review , Volume 86 , Issue Jul , Pages 43-50

Conference Paper
Backward-looking interest-rate rules, interest-rate smoothing, and macroeconomic instability

The existing literature on the stabilizing properties of interest-rate feedback rules has stressed the perils of linking interest rates to forecasts of future inflation. Such rules have been found to give rise to aggregate fluctuations due to self-fulfilling expectations. In response to this concern, a growing literature has focused on the stabilizing properties of interest-rate rules whereby the central bank responds to a measure of past inflation. The consensus view that has emerged is that backward-looking rules contribute to protecting the economy from embarking on expectations-driven ...
Proceedings

Conference Paper
Incomplete cost pass-through under deep habits

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