Evidence suggests that banks, like firms, face financial frictions when raising funds. The authors develop a quantitative, monetary business cycle model in which agency problems affect both the relationship between banks and firms and the relationship between banks and their depositors. As a result, bank capital and entrepreneurial net worth jointly determine aggregate investment, and are impor...

JEL classification E52 This paper examines the credibility of the Federal Reserve's monetary targets using survey data on money growth forecasts to measure market expectations. The paper provides two main results. First, there is strong evidence that the monetary targets were credible over the 1978 to 1993 sample period, although credibility fell in the post-1985 period. Second, both the federa...

This paper derives the optimal size and timing of interest rate target changes. Despite the simplicity of the optimal rule, we are able to replicate a number of puzzling features of interest rate targeting observed in practice, as well as explain some dynamic properties of market interest rates. Extensions to deal with monetary policy cycles, anticipated and unanticipated target changes, and th...

What are the quantitative macroeconomic effects of countercyclical capital buffer (CCyB)? I study this question in a nonlinear DSGE model with occasional financial crises, which is calibrated and combined US data to estimate sequences structural shocks. Raising buffers during leverage expansions can reduce frequency crises by more than half. A application 2007-08 crisis shows that CCyB 2:5% ran...

The papers in this symposium address the issue of multiple equilibria that can be induced by monetary policy in models with capital accumulation. In particular they examine how the “Taylor Principle”, under which interest rates respond more than proportionately to increases in inflation, can generate multiple equilibria. They also explore the design of policies to avoid the problem of multiple ...

We show that for generic economies, every equilibrium admits Pareto improving monetary policy, even with multiple commodities per state. The main assumption is that asset incompleteness be intermediate, in that household heterogeneity does not exceed the number of assets present and absent. We argue this as a special case of the general framework in Turner (2003b) for proving the generic existe...

So far the literature on DSGE models with energy price shocks uses energy on the production side only. In these models, energy shocks are responsible for only a negligible share of output fluctuations. We study the robustness of this finding. The aim of our paper is to model the response of household behavior to energy shocks in more detail as in the existing literature. Specifically, in additi...

We take as a starting point the existence of a joint distribution implied by different dynamic stochastic general equilibrium (DSGE) models, all of which are potentially misspecified. Our objective is to compare ‘‘true’’ joint distributions with ones generated by given DSGEs. This is accomplished via comparison of the empirical joint distributions (or confidence intervals) of historical and sim...

This paper evaluates the performance of optimal simple policy rules in the presence of news shocks. It is shown that the inclusion of forward-looking elements enhances the performance of simple optimized interest rate rules when agents learn about future disturbances in advance. We provide a rationale for this result by demonstrating that, if shocks are news shocks, the optimal unrestricted con...

We develop a multi-sector sticky-price DSGE model that can endogenously deliver differential responses of prices to aggregate and sectoral shocks. Input-output production linkages induce across-sector pricing complementarities that contribute to a slow response of prices to aggregate shocks. In turn, labor-market segmentation at the sectoral level induces within-sector pricing substitutability,...