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Working Paper
Open Mouth Operations
We examine the standard New Keynesian economy?s Ramsey problem written in terms of instrument settings instead of allocations. Its standard formulation makes two instruments available: the path of current and future interest rates, and an ?open mouth operation? which selects one of the many equilibria consistent with the chosen interest rates. Removing the open mouth operation by imposing a finite commitment horizon yields pathological policy advice that relies on the model's forward guidance puzzle.
Working Paper
Discretion Rather than Rules: Equilibrium Uniqueness and Forward Guidance with Inconsistent Optimal Plans
New Keynesian economies with active interest rate rules gain equilibrium determinacy from the central bank?s incredible off-equilibrium-path promises (Cochrane, 2011). We suppose instead that the central bank sets interest rate paths and occasionally has the discretion to change them. Private agents taking future central bank actions and their own best responses to them as given reduces the scope for self-fulfilling prophecies. With empirically-reasonable frequencies of central-bank reoptimization, the monetary-policy game has a unique Markov-perfect equilibrium wherein forward guidance ...
Report
Congestion in Onboarding Workers and Sticky R&D
R&D investment spending exhibits a delayed and hump-shaped response to shocks. We show in a simple partial equilibrium model that rapidly adjusting R&D investment is costly if the probability of converting new hires into productive R&D workers (“onboarding”) is decreasing in the number of new hires (“congestion”). Congestion thus causes R&D-producing firms to slowly hire new workers in response to good shocks and hoard workers in response to bad shocks, providing a microfoundation for convex adjustment costs in R&D investment. Using novel, high-frequency productivity data on ...