Using a standard open economy DSGE model, it is shown that the timing of asset trade relative to policy decisions has a potentially important impact on the welfare evaluation of monetary policy at the individual-country level. If asset trade in the initial period takes place before the announcement of policy, a national policy maker can choose a policy rule that reduces the work effort of households in the policy maker's country, in the knowledge that consumption is fully insured by optimally chosen international portfolio positions. But if asset trade takes place after the policy announcement, this insurance is absent and households in the policy maker's country bear the full consumption consequences of the chosen policy rule. The welfare incentives faced by national policy makers are very different between the two cases. Numerical examples confirm that asset-market timing has a significant impact on the optimal policy rule.

The recent macroeconomic literature stresses the importance of managing heterogeneous expectations in the formulation of monetary policy. We use a simple frictionless dynamic stochastic general equilibrium (DSGE) model to investigate inflation dynamics under alternative interest rate rules when agents have heterogeneous expectations, and update their beliefs based on past performance, as in Brock and Hommes [Econometrica 65(5), 1059–1095 (1997)]. The stabilizing effect of different monetary policies depends on the ecology of forecasting rules (i.e., the composition of the set of predictors), on agents' sensitivity to differences in forecasting performance, and on how aggressively the monetary authority sets the nominal interest rate in response to inflation. In particular, if the monetary authority responds only weakly to inflation, a cumulative process with rising inflation is likely. On the other hand, a Taylor interest rate rule that sets the interest rate more than point for point in response to inflation stabilizes inflation dynamics, but does not always lead the system to converge to the rational expectations equilibrium, as multiple equilibria may persist.

We construct a unified overlapping-generations framework of equilibrium growth that includes the Blanchard “perpetual youth” model, the Samuelson model, and the infinitely lived–agent model as limit specifications for a “realistic” two-parameter survivorship function. We assess how the limit specifications compare with the general survival function, and analyze how exogenous changes in demographic conditions affect equilibrium growth and savings rates. Predicted effects are consistent with some cross-country correlations between demographic conditions and growth rates.

In this paper we investigate the relationship between money growth uncertainty and the level of economic activity in the United States. We pay explicit attention to the Divisia monetary aggregates. In doing so, we use the new vintage of the data [called MSI (monetary services indices) by the St. Louis Fed], together with the simple sum monetary aggregates, over the period from 1967:1 to 2011:3. In the context of a bivariate VARMA, GARCH-in-mean, asymmetric BEKK model, we show that increased Divisia money growth volatility (irrespective of the level of aggregation and the method of calculation) is associated with a lower average growth rate of real economic activity. However, there are no effects of simple-sum money growth volatility on real economic activity, except with the Sum M1 and perhaps Sum M2M aggregates. We conclude that monetary policies that focus on the Divisia monetary aggregates and target their growth rates will contribute to higher overall economic growth.

In this paper, we study the effects of government debt on macroeconomic aggregates in a non-Ricardian framework. We develop a microfounded framework that combines time-varying markups, endogenous labor supply, and overlapping generations based on infinitely lived families. The main contribution of this paper is to provide a new transmission mechanism for public debt through the countercyclical markup movements induced by external deep habits. We analyze the effects of a positive shock to public debt. We show that the interest rate rises, entailing higher markups and a fall in employment and consumption. Interestingly, even without capital, a crowding-out effect of government debt is obtained in the long run. In addition, we show that when prices are sticky, public debt has a short-run expansionary effect, which is strengthened by the presence of deep habits.

This paper characterizes optimal monetary policy in an economy with endogenous firm entry, a cash-in-advance constraint, and preset wages. Firms must make profits to cover entry costs; thus the markup on goods prices is efficient. However, because leisure is not priced at a markup, the consumption–leisure trade-off is distorted. Consequently, the real wage, hours, and production are suboptimally low. Because of the labor requirement for entry, insufficient labor supply also implies that entry is too low. This paper shows that in the absence of fiscal instruments such as labor income subsidies, the optimal monetary policy achieves higher welfare under sticky wages than under flexible wages. The policy maker uses the money supply instrument to raise the real wage—the cost of leisure—above its flexible-wage level, in response to expansionary shocks to productivity and entry costs. This increases labor supply, expanding production and firm entry.