This paper studies the role of monetary policy for the dynamics of US mortgage debt, which accounts for the largest part of household debt. A time-varying parameter vector autoregressive (VAR) model allows us to study the variation in the sensitivity of mortgage debt to monetary policy. We find that an identically sized policy shock became less effective over time. We use a dynamic stochastic general equilibrium model to show that a fall in the share of adjustable rate mortgages (ARMs) can replicate this finding. Calibrating the model to the drop in the ARM share since the 1980s yields a decline in the sensitivity of housing debt to monetary policy which is quantitatively similar to the VAR results. A sacrifice ratio for mortgage debt reveals that a policy tightening directed toward reducing household debt became more expensive in terms of a loss in employment. Counterfactuals show that this result cannot be attributed to changes in monetary policy itself.

I assess a novel rule that was introduced in the UK in 2015. It gave the British government fiscal flexibility whenever GDP growth warranted it. This rule lasted just a year, but it had features worth exploring. I apply solution methods for models with occasionally-binding constraints to assess the demand stabilisation properties of state-contingent fiscal rules. First it is shown that fiscal flexibility can make recessions shallower. Second, it is suggested that GDP growth, rather than measures of the output gap, is a better indicator for triggering fiscal flexibility.

Table 4 of this article was incorrectly published with subheadings in Table 4 missing. The publisher regrets this error and the correct version of Table 4 is presented here. Table 4.

Present-value multipliers for different specifications of fiscal policy in the new Keynesian model with rational expectations and with adaptive learning

	Rational expectations				Adaptive learning
	Impact	1 year	4 years	6 years	Impact	1 year	4 years	6 years
Strategy 1: Lump-sum financing (baseline model)
$\frac{{PV\left( {\Delta Y} \right)}}{{PV\left( {\Delta G} \right)}}\$	0.51	0.50	0.46	0.43	1.01	1.00	0.99	0.97
$\frac{{PV\left( {\Delta C} \right)}}{{PV\left( {\Delta G} \right)}}\$	−0.29	−0.30	−0.34	−0.37	0.09	0.09	0.07	0.06
$\frac{{PV\left( {\Delta I} \right)}}{{PV\left( {\Delta G} \right)}}\$	−0.20	−0.20	−0.20	−0.20	−0.08	−0.08	−0.09	−0.09
Strategy 2: Capital tax financing
$\frac{{PV\left( {\Delta Y} \right)}}{{PV\left( {\Delta G} \right)}}\$	0.32	0.29	0.12	0.02	0.43	0.38	0.20	0.08
$\frac{{PV\left( {\Delta C} \right)}}{{PV\left( {\Delta G} \right)}}\$	−0.23	−0.26	−0.40	−0.48	−0.08	−0.12	−0.27	−0.37
$\frac{{PV\left( {\Delta I} \right)}}{{PV\left( {\Delta G} \right)}}\$	−0.68	−0.69	−0.70	−0.71	−0.80	−0.80	−0.81	−0.82
Strategy 3: Labor tax financing
$\frac{{PV\left( {\Delta Y} \right)}}{{PV\left( {\Delta G} \right)}}\$	−0.64	−0.68	−0.85	−0.95	0.48	0.47	0.43	0.40
$\frac{{PV\left( {\Delta C} \right)}}{{PV\left( {\Delta G} \right)}}\$	−1.07	−1.10	−1.24	−1.33	−0.37	−0.38	−0.41	−0.43
$\frac{{PV\left( {\Delta I} \right)}}{{PV\left( {\Delta G} \right)}}\$	−0.71	−0.71	−0.73	−0.74	−0.17	−0.18	−0.18	−0.18

Nine out of the last ten recessions in the United States have been preceded by an increase in the price of oil as noted by Hamilton [Palgrave Dictionary of Economics]. Given the small share of energy in gross domestic product this phenomenon is difficult to explain using standard models. In this paper, I show that firm entry can be an important transmission and amplifying channel for energy price shocks. The results from the baseline dynamic stochastic general equilibrium (DSGE) model predict a drop in output that is two times the impact in a model without entry. The model also predicts an increase in energy prices would lead to a decline in real wages, investment, consumption, and return on investment. Additionally, using US firm level data, I demonstrate that a rise in energy prices has a negative impact on firm entry as predicted by the DSGE model. This lends further support toward endogenizing firm entry when analyzing the effects of energy price shocks.

Against the background of the emergence of macroeconomic imbalances within the European Monetary Union (EMU), we investigate in this paper the macroeconomic consequences of cross-border banking in monetary unions such as the Euro area. For this purpose, we incorporate a union-wide banking sector along the lines in an otherwise standard two-region monetary union DSGE model, accounting for borrowing constraints of entrepreneurs and impatient households and an internal constraint on the bank's leverage ratio. We illustrate in particular how rule-of-thumb lending standards based on the macroeconomic performance of the core region within the monetary union can translate into destabilizing spill-over effects into the other region, resulting in an overall higher macroeconomic volatility. Thereby, we demonstrate a channel through which the financial sector may have exacerbated the emergence of macroeconomic imbalances within the EMU. This effect may be mitigated by macroprudential policies, where especially policies that force the bank's lending standards to be less procyclical prove to be effective in stabilizing output in both regions of the monetary union.

This paper examines the government spending multiplier when economic agents combine adaptive learning and knowledge about future fiscal policy to form their expectations. The analysis shows that the effects of a government spending shock substantially change when the rational expectations hypothesis is replaced by this learning mechanism. In contrast to the dynamics under rational expectations, a government spending shock in a small-scale new Keynesian DSGE model with learning crowds in private consumption and is associated with a positive comovement between real wages and hours worked. In the baseline calibration, the output multiplier under learning is above one and about twice as large as under rational expectations.

To explain the high and persistent unemployment rate in the United States during and after the Great Recession, this effort develops and estimates a dynamic stochastic general equilibrium model with search and matching frictions and shocks to unemployment benefits and matching efficiency. It finds that unemployment benefits play an important role in the cyclical movement of unemployment through their effects on labor demand, a channel overlooked in previous studies. From the second half of 2008 to 2011, extended unemployment benefits may have increased the overall unemployment rate by one percentage point. In contrast, matching efficiency changes had less effect on the cyclical movement of unemployment for the same period, but significantly slowed down the recovery after 2012.

We document the strong evidence of time variation in the volatility of Euro Area business cycles since 1970. Then we provide the quantitative sources of these changes using a medium-scale DSGE model allowing time variation in structural disturbance variances. We show that (1) the size of different types of shock oscillates, in a synchronized manner, between two regimes over time, with the high-volatility regime prevailing predominantly in the 1970s, sporadically in the 1980s and 1990s, and during the Great Recession; (2) their relative importance remains, however, unchanged across regimes, where neutral technology shocks and marginal efficiency of investment shocks are the dominant sources of business cycle fluctuations; and 3) these investment shocks, which affect the transformation of savings into productive capital, can be interpreted as an indicator of credit conditions.