We examine the frequency of price changes for 350 categories of goods and services covering about 70 % of consumer spending, based on unpublished data from the BLS for 1995 to 1997. Compared with previous studies we find much more frequent price changes, with half of goods' prices lasting less than 4.3 months. Even excluding the role of temporary price cuts (sales), we find that half of goods' prices last 5.5 months or less. The frequency of price changes differs dramatically across categories. We exploit this variation to ask how inflation for "flexible-price goods" (goods with frequent changes in individual prices) differs from inflation for "sticky-price goods" (those displaying infrequent price changes). Compared to the predictions of popular sticky price models, actual inflation rates are far more volatile and transient, particularly for sticky-price goods.

Using U.S. data and Bayesian methods, we quantify the contribution of the housing market to business fluctuations. The estimated model, which contains nominal and real rigidities and collateral constraints, is used to address two questions. First, what shocks drive the housing market? We find that the upward trend in real housing prices of the last 40 years can be explained by slow technological progress in the housing sector. Over the business cycle instead, housing demand and housing technology shocks account for roughly one-quarter each of the volatility of housing investment and housing prices. Monetary factors account for about 20 percent, but they played a major role in the housing market cycle at the turn of the century. Second, do fluctuations in the housing market propagate to other forms of expenditure? We find that the spillovers from the housing market to the broader economy are non-negligible, concentrated on consumption rather than business investment, and they have become more important over time, to the extent that financial innovation has increased the marginal availability of funds for credit-constrained agents.

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Abstract We develop a quantitative monetary DSGE model with …nancial intermediaries that face endogenously determined balance sheet constraints. We then use the model to evaluate the e¤ects of the central bank using unconventional monetary policy to combat a simulated …nancial crisis. We interpret unconventional monetary policy as expanding central bank credit intermediation to o¤set a disruption of private …nancial intermediation. Within our framework the central bank is less e¢ cient than private intermediaries at making loans but it has advantage of being able to elastically obtain funds by issuing riskless government debt. Unlike private intermediaries, it is not balance-sheet constrained. During a crisis, the balance sheet constraints on private intermediaries tighten, raising the net bene…ts from central bank intermediation. These bene…ts may be substantial even if the zero lower bound constraint on the nominal interest rate is not binding. In the event this constraint is binding, though, these net bene…ts may be signi…cantly enhanced. Much thanks to Bob Hall and Hal Cole for comments on an earlier draft and to Luca Guerrieri for computational help.

We develop a canonical framework to think about credit market frictions and aggregate economic activity in the context of the current crisis. We use the framework to address two issues in particular: first, how disruptions in financial intermediation can induce a crisis that affects real activity; and second, how various credit market interventions by the central bank and the Treasury of the type we have seen recently, might work to mitigate the crisis. We make use of earlier literature to develop our framework and characterize how very recent literature is incorporating insights from the crisis.

The goal of this paper is to compute optimal monetary and fiscal policy rules in a real business cycle model augmented with sticky prices, a demand for money, taxation, and stochastic government consumption. We consider simple policy rules whereby the nominal interest rate is set as a function of output and inflation, and taxes are set as a function of total government liabilities. We require policy to be implementable in the sense that it guarantees uniqueness of equilibrium. We do away with a number of empirically unrealistic assumptions typically maintained in the related literature that are used to justify the computation of welfare using linear methods. Instead, we implement a second-order accurate solution to the model. Our main findings are: First, the size of the inflation coefficient in the interest-rate rule plays a minor role for welfare. It matters only insofar as it affects the determinacy of equilibrium. Second, optimal monetary policy features a muted response to output. More importantly, interest rate rules that feature a positive response of the nominal interest rate to output can lead to significant welfare losses. Third, the optimal fiscal policy is passive. However, the welfare losses associated with the adoption of an active fiscal stance are negligible.

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A number of studies have stressed the role of movements in US interest rates and country spreads in driving business cycles in emerging market economies. At the same time, country spreads have been found to respond to changes in both the US interest rate and domestic conditions in emerging markets. These intricate interrelationships leave open a number of fundamental questions: Do country spreads drive business cycles in emerging countries or vice versa, or both? Do US interest rates affect emerging countries directly or primarily through their effect on country spreads? This paper addresses these and other related questions using a methodology that combines empirical and theoretical elements. The main findings are: (1) US interest rate shocks explain about 20 percent of movements in aggregate activity in emerging market economies at business-cycle frequency. (2) Country spread shocks explain about 12 percent of business-cycle movements in emerging economies. (3) About 60 percent of movements in country spreads are explained by country-spread shocks. (4) In response to an increase in US interest rates, country spreads first fall and then display a large, delayed overshooting; (5) US-interest-rate shocks affect domestic variables mostly through their

ABSTRACT. A multivariate model, identifying monetary policy and allowing for simultaneity and regime switching in coefficients and variances, is confronted with US data since 1959. The best fit is with a model that allows time variation in structural disturbance variances only. Among models that allow for changes in equation coefficients also, the best fit is for a model that allows coefficients to change only in the monetary policy rule. That model allows switching among three main regimes and one rarely and briefly occurring regime. The three main regimes correspond roughly to periods when most observers believe that monetary policy actually differed, and the differences in policy behavior are substantively interesting, though statistically ill-determined. The estimates imply monetary targeting was central in the early 80’s, but also important sporadically in the 70’s. The changes in regime were essential neither to the rise in inflation in the 70’s nor to its decline in the 80’s. I. THE DEBATE OVER MONETARY POLICY CHANGE In an influential paper, Clarida, Galí and Gertler 2000 (CGG) presented evidence that US monetary policy changed between the 1970’s and the 1980’s, indeed that in the 70’s