Under limited commitment that prevents agents from pledging their future nonfinancial wealth, agents with incorrect beliefs always survive by holding on their nonfinancial wealth. Friedman (1953)’s market selection hypothesis suggests that their financial wealth trends towards zero in the long run. However, in this paper, I construct an example in dynamic general equilibrium in which over-optim...

This paper evaluates the welfare implications of monetary policy rules when international financial markets are incomplete. Using a two-country dynamic general equilibrium monetary model, we evaluate the magnitude of the costs of imperfect risk sharing. Under a price stability policy in both countries, they are in the range of 0.07-0.70 percent of a permanent shift in steady-state consumption. ...

It is commonly thought that interest rates should decrease in response to a positive velocity innovation. Velocity innovations, therefore, should lead to the same qualitative effects in the financial and goods markets as money supply innovations. The present paper represents an empirical investigation of the above theoretical statements. By using structural Vector Autoregression (VAR) methods, ...