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Working Paper
Output Gap, Monetary Policy Trade-offs, and Financial Frictions
This paper investigates how the presence of pervasive financial frictions and large financial shocks changes the optimal monetary policy prescriptions and the estimated dynamics in a New Keynesian model. We find that financial factors affect the optimal policy only to some extent. A policy of nominal stabilization (with a particular focus on targeting wage inflation) is still the optimal policy, although the central bank is now unable to fully stabilize economic activity around its potential level. In contrast, the presence of financial frictions and financial shocks crucially changes the ...
Journal Article
Obstacles to measuring global output gaps
Monetary policymakers pay close attention to levels of resource use. In the past, the focus was largely on domestic slack. Now, some analysts contend the ongoing process of globalization requires policymakers to look at global slack as well.