I develop a general equilibrium model with sticky prices, credit constraints, nominal loans and asset prices. Changes in asset prices modify agents ’ borrowing capacity through collateral value; changes in nominal prices affect real repayments through debt deflation. Monetary policy shocks move asset and nominal prices in the same direction, and are amplified and propagated over time. The “financial accelerator ” is not constant across shocks: nominal debt stabilises supply shocks, making the economy less volatile when the central bank controls the interest rate. I discuss the role of equity, debt indexation and household and firm leverage in the propagation mechanism. Finally, I find that monetary policy should not target asset prices as a means of reducing output and inflation volatility.

Abstract Americans now work 50 percent more than do the Germans, French, and Italians. This was not the case in the early 1970s, when the Western Europeans worked more than Americans. This article examines the role of taxes in accounting for the differences in labor supply across time and across countries; in particular, the effective marginal tax rate on labor income. The population of countries considered is the G-7 countries, which are major advanced industrial countries. The surprising fi nding is that this marginal tax rate accounts for the predominance of differences at points in time and the large change in relative labor supply over time.

This paper argues that the typical household’s saving is better described by a “bufferstock” version than by the traditional version of the Life Cycle/Permanent Income Hypothesis (LC/PIH) model. Buffer-stock behavior emerges if consumers with important income uncertainty are sufficiently impatient. In the traditional model, consumption growth is determined solely by tastes; in contrast, buffer-stock consumers set average consumption growth equal to average labor income growth, regardless of tastes. The model can explain three empirical puzzles: the “consumption/income parallel ” of Carroll and Summers [1991]; the “consumption/income divergence ” first documented in the 1930's; and the temporal stability of the household age/wealth profile despite the unpredictability of idiosyncratic wealth changes.

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Search-theoretic models of monetary exchange are based on explicit descriptions of the frictions that make money essential. However, tractable versions of these models typically make strong assumptions that render them ill suited for monetary policy analysis. We propose a new framework, based on explicit micro foundations, within which macro policy can be studied. The framework is analytically tractable and easily quantifiable. We calibrate the model to standard observations and use it to measure the cost of inflation. We find that going from 10 percent to 0 percent inflation is worth between 3 and 5 percent of consumption-much higher than previous estimates.

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In this paper, we extend the basic Mortensen-Pissarides search and matching model along two dimensions. First, we allow for ex-ante heterogeneity between workers. Second, two technology shocks, neutral and investment-specific, are the driving forces of the economy. Specifically, we integrate the framework of Krusell, Ohanian, Ríos-Rull, and Violante (2000)- a production function with capital-skill complementarity and two skill-groups- into a business-cycle search and matching model. We calibrate the model extending the approach in Hagedorn and Manovskii (2006) and find that the model accounts well for the cyclical behavior of labor market variables in the aggregate and for each demographic group. We show that the response of unemployment to changes in taxes or unemployment insurance benefits is substantially reduced in the model with worker heterogeneity.

This paper develops two new methods for conducting formal statistical inference in nonlinear dynamic economic models. The two methods require very little analytical tractability, relying instead on numerical simulation of the model's dynamic behaviour. Although one of the estimators is asymptotically more efficient than the other, a Monte Carlo study shows that, for a specific application, the less efficient estimator has smaller mean squared error in samples of the size typically encountered in macroeconomics. The estimator with superior small sample performance is used to estimate the parameters of a real business cycle model using observed US time-series data. 1.

This paper considers propagation of aggregate shocks in a dynamic general-equilibrium model with labor-market matching and endogenous job destruction. Cyclical fluctuations in the job-destruction rate magnify the output effects of shocks, as well as making them much more persistent. Interactions between capital adjust-ment and the job-destruction rate play an important role in generating persistence. Propagation effects are shown to be quantitatively substantial when the model is calibrated using job-flow data. Incorporating costly capital adjustment leads to significantly greater propagation. (JEL E24, E32) It has been well documented that the cyclical adjustment of labor input chiefly represents move-ment of workers into and out of employment, rather than adjustment of hours at given jobs. Thus, in understanding business cycles, it is cen-trally important to understand the formation and breakdown of employment relationships. The na-