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This paper studies the effect of sentiment on asset prices during the 20th century (1905 to 2005). As a proxy for sentiment, we use the fraction of positive and negative words in two columns of financial news from the New York Times. The main contribution of the paper is to show that, controlling for other well-known time-series patterns, the predictability of stock returns using news' content is concentrated in recessions. A one standard deviation shock to our news measure during recessions predicts a change in the conditional average return on the DJIA of 12 basis points over one day. [ABSTRACT FROM AUTHOR]

Macroeconomic models with microeconomic foundations allow for comparisons with macro and micro empirical evidence. This paper proposes a model wherein firms: (i) acquire information infrequently, generating sticky information () and (ii) face menu costs, producing state-dependent sticky prices. I estimate parameters via indirect inference and show that under considerable real rigidity, sticky prices in a sticky-information environment are consistent with micro and macro evidence. Sticky prices not only help match micro data on price changes' size and durations between adjustments; they also improve the model's fit with the macro data, as embodied in an empirical Phillips curve. [ABSTRACT FROM AUTHOR]

This paper characterizes the time-series properties of debt:GDP ratios in 10 EU countries over 1982-2009 and measures the size and source of the permanent effects of shocks as they evolve over time. The analysis shows debt dynamics in the EU10 are complicated, involving important intercountry interactions and protracted adjustment periods of about 10 years. We find evidence of asymmetries in the effects of different forms of 'fiscal consolidation,' with unanticipated reductions in government spending having a more permanent effect than unanticipated increases in government revenue. Unanticipated business cycle fluctuations also have important long-term effects on the ratio. [ABSTRACT FROM AUTHOR]

In this paper, I use weekly data from seven emerging nations-four in Latin America and three in Asia-to investigate the extent to which changes in Fed policy interest rates have been transmitted into domestic short-term interest rates during the 2000s. The results suggest that there is indeed an interest rates 'pass-through' from the Fed to emerging markets. However, the extent of transmission of interest rate shocks is different-in terms of impact, steady state effect, and dynamics-in Latin America and Asia. The results also indicate that capital controls are not an effective tool for isolating emerging countries from global interest rate disturbances. Changes in the slope of the U.S. yield curve, including changes generated by a 'twist' policy, affect domestic interest rates in emerging countries. I also provide a detailed case study for Chile. [ABSTRACT FROM AUTHOR]

This paper studies a general equilibrium model that is consistent with recent empirical evidence showing that the U.S. price level and inflation are much more responsive to aggregate technology shocks than to monetary policy shocks. Specifically, we show that the fact that aggregate technology shocks are more volatile than monetary policy shocks induces firms to pay more attention to the former than to the latter. However, most important, this work adds to the literature by analytically showing how monetary policy feedback rules affect the incentives faced by firms in allocating attention. A policy rule responding more actively to inflation fluctuations induces firms to pay relatively more attention to more volatile shocks, helping to rationalize the observed behavior of prices in response to technology and monetary policy shocks. [ABSTRACT FROM AUTHOR]

This paper uses a dynamic stochastic general equilibrium (DSGE) model to explore additional information that can be extracted from the yield curve about the Federal Reserve's implicit inflation target. In the model, monetary policy follows a nominal interest rate rule with a drifting inflation target, and agents have imperfect information about the persistent component of the inflation target. When the yield curve information is included, the DSGE model generates inflation expectations that are highly correlated with survey data evidence. In the DSGE model, agents quickly learn the inflation target and the gap between the perceived target and the actual target is quantitatively small. This is in contrast to some existing studies that suggest a persistent role of imperfect information even as long-run inflation expectations have declined and stabilized at a low level since the mid 1980s. [ABSTRACT FROM AUTHOR]

This paper demonstrates that subordinated debt (subdebt thereafter) regulation can be an effective mechanism for disciplining banks. By reducing the chance that managers of distressed banks can take value-destroying actions to benefit themselves, subdebt regulation may encourage banks to lower asset risk. Moreover, subdebt regulation and bank capital requirements can be complements for alleviating the banks' moral hazard problems. To make subdebt regulation effective, regulators may need impose ceilings on the interest rates of subdebt, prohibit collusion between banks and subdebt investors, and require subdebt to convert into the issuing bank's equity when the government provides assistance to the bank. [ABSTRACT FROM AUTHOR]

A central proposition in research on the role of banks in the transmission mechanism is that monetary policy imparts a direct impact on deposits and that deposits act as the driving force of bank lending. This paper argues that the emphasis on policy-induced changes in deposits is misplaced. A reformulation of the bank lending channel is proposed that works primarily through the impact of monetary policy on banks' balance sheet strength and risk perception. Such a recasting implies, contrary to conventional wisdom, that greater reliance on market-based funding enhances the importance of the channel. [ABSTRACT FROM AUTHOR]

The U.S. dollar is the central reference currency for international trade pricing and the main invoicing currency for primary commodities. This paper links these two observations within a stylized theoretical framework, and shows how to obtain a quantitative estimate of the gain to the U.S. economy when the dollar is a reference currency. With dollar invoicing of primary commodities, U.S. firms bear less exchange rate risk than foreign firms. This asymmetry leads to a dollar standard in international goods pricing. We then derive a simple analytical formula to calculate the gains and find that they are extremely small. [ABSTRACT FROM AUTHOR]

The author discusses the article “Global Liquidity, House Prices, and the Macroeconomy: Evidence from Advanced and Emerging Economies” by Ambrogio Cesa-Bianchi, Luis Felipe Cespedes, and Alessandro Rebucci, which appears in the current issue. He assesses the authors' analysis of the role of global bank credit levels in causing fluctuations in home prices. Topics include economic shocks and the challenge of explaining how house price trends and volatility differ between countries.

This paper studies two frictions, good-specific habit formation and price rigidities, used in theoretical models to generate the crowding-in of consumption by expansionary government spending observed in the data. Both frictions generate countercyclical price markups, rising wages, and ensuing consumption-leisure substitution to overcome the negative wealth effect of the fiscal expansion. I demonstrate that while they independently support the rise of consumption, when used together the two frictions exert opposing pressures on the markup and the wage, weakening consumption-leisure substitution. Crucially, when price stickiness is high enough in an economy with 'deep' habits, consumption is crowded out by the fiscal expansion. [ABSTRACT FROM AUTHOR]

This paper employs newly constructed measures for productivity differentials, external imbalances, and commodity terms of trade to estimate a panel cointegrating relationship between real exchange rates and a set of fundamentals for a sample of 48 industrial countries and emerging markets. It finds evidence of a strong positive relation between the consumer price index-based real exchange rate and commodity terms of trade. The estimated impact of productivity growth differentials between traded and nontraded goods, while statistically significant, is small. Increases in net foreign assets, government consumption, and trade restrictions tend to be associated with appreciating real exchange rates. [ABSTRACT FROM AUTHOR]

Why is the equity premium so high, and why are stocks so volatile? Why are stock returns in excess of government bill rates predictable? This paper proposes an answer to these questions based on a time-varying probability of a consumption disaster. In the model, aggregate consumption follows a normal distribution with low volatility most of the time, but with some probability of a consumption realization far out in the left tail. The possibility of this poor outcome substantially increases the equity premium, while time-variation in the probability of this outcome drives high stock market volatility and excess return predictability. [ABSTRACT FROM AUTHOR]

Payment and settlement networks typically involve various tiers of intermediation. This paper develops a model of settlement system to study the endogenous structure of tiered settlement networks, and the welfare consequences of clearing agent (CA) failure. We offer two explanations for tiering: private information regarding participant's credit worthiness and economies of scale in the participation in the settlement system. CAs play a monitoring and cost-saving role in the settlement network. As a result, a failure of a CA can lead to a large and persistent welfare loss to the economy. [ABSTRACT FROM AUTHOR]

This paper presents an alternative maximum likelihood estimation method for partially identified vector autoregressive models. This method might be especially useful to handle very large systems of variables by reducing the dimension of the likelihood space. As an application, we consider an open economy model to investigate the effects of monetary policy on exchange rates and term structures. We find that exchange rates tend to overshoot and term structures have hump-shaped responses to monetary policy shocks. [ABSTRACT FROM AUTHOR]

This paper investigates the empirical evidence of long-run risk and its implications for the equity premium puzzle. We find that the long-run risk model is generally weakly identified and that standard inferences tend to underestimate the uncertainty of long-run risk. We extend the LM-type test of Ma and Nelson (2010) that remains valid under weak identification to the bivariate VARMA-GARCH model of consumption and dividend growth. The results cast doubt on the validity of long-run risk as an explanation for the equity premium puzzle. We also evaluate the approach of Bansal, Kiku, and Yaron (2007a), which extracts long-run risk by regressing consumption growth and its volatility on predictive variables. The results using the Bonferroni Q-test of Campbell and Yogo (2006) suggest that consumption and dividend growth are generally unpredictable by the price-dividend ratio and risk-free rate. This casts doubt on the validity of the BKY approach. [ABSTRACT FROM AUTHOR]

ABSTRACT We model the interactions between product market competition and investment valuation within a dynamic oligopoly. To our knowledge, the model is the first continuous-time corporate finance model in a multiple firm setting with heterogeneous products. The model is tractable and amenable to estimation. We use it to relate current industry characteristics with firm value and financial decisions. Unlike most corporate finance models, it produces predictions regarding parameter magnitudes as well their signs. Estimates of the model's parameters indicate strong linkages between model-implied and actual values. The paper uses the estimated parameters to predict rivals' returns near merger announcements. [ABSTRACT FROM AUTHOR]

The paper compares the quality of real-time forecasts from a standard medium-scale New Keynesian dynamic stochastic general equilibrium (DSGE) model to those from the Survey of Professional Forecasters (SPF) and DSGE-VARs. It is shown that the DSGE model is relatively successful in forecasting the U.S. economy. This is especially true for forecasts conditional on SPF nowcasts, in which case the forecasting power of the DSGE turns out to be similar or better than that of the SPF for all the variables and horizons. An important weakness of the benchmark DSGE model is the poor absolute performance of its point forecasts and rather badly calibrated forecast densities. [ABSTRACT FROM AUTHOR]

This paper reviews alternative options for monetary policy when the short-term interest rate is at the zero lower bound and develops new empirical estimates of the effects of the maturity structure of publicly held debt on the term structure of interest rates. We use a model of risk-averse arbitrageurs to develop measures of how the maturity structure of debt held by the public might affect the pricing of level, slope, and curvature term structure risk. We find that these Treasury factors historically were quite helpful for predicting both yields and excess returns over 1990-2007. The historical correlations are consistent with the claim that if in December 2006, the Fed were to have sold off all its Treasury holdings of less than 1-year maturity (about $400 billion) and use the proceeds to retire Treasury debt from the long end, this might have resulted in a 14-basis-point drop in the 10-year rate and an 11-basis-point increase in the 6-month rate. We also develop a description of how the dynamic behavior of the term structure of interest rates changed after hitting the zero lower bound in 2009. Our estimates imply that at the zero lower bound, such a maturity swap would have the same effects as buying $400 billion in long-term maturities outright with newly created reserves and could reduce the 10-year rate by 13 basis points without raising short-term yields. [ABSTRACT FROM AUTHOR]

The article presents commentary on an article in the current issue by Jonathan Chiu and Miguel Molico entitled "Uncertainty, Inflation, and Welfare." The author describes Chiu's and Molico's paper, then discusses quantitative and alternative-modeling issues raised by it. He notes the importance of Chiu's and Molico's inclusion of a centralized market in facilitating the trade of goods. He also discusses results he obtains from Chiu's and Molico's model by assuming an environment in which agents confront alternating types of Walrasian markets.

This paper investigates the possibility of shifts in the UK economy using a Markov switching open economy dynamic stochastic general equilibrium (DSGE) model. We find overwhelming evidence to reject the hypothesis that the deep structural parameters of the underlying structural model had stayed constant throughout the sample period and there is significant changes to the volatility of the structural shocks. Counterfactual experiments based on the model with the best empirical fit indicate that the change in the policy rule as well as changes to the volatility of the structural shocks over the sample period are crucial features in explaining UK's macroeconomic performance. [ABSTRACT FROM AUTHOR]

This paper identifies two mechanisms that empirical papers on central bank independence assume to be embedded in the yardstick measure of turnover rate of central bank governor: (i) the removal of a governor who is perceived as a challenger by the government and (ii) whether his/her replacement is an ally of the government. We identify the first mechanism with premature exits of central bankers and the second by examining whether or not the incoming governor is drawn from the ranks of the executive branch of the government. We find that only premature exits and replacements with government allies increase inflation. [ABSTRACT FROM AUTHOR]

In this paper, I examine the differences in optimal monetary policy in various banking systems. In particular, I compare two monetary economies: one with a competitive banking system and the other with a monopolistic one. In addition, the optimality of the discount window policy is considered. It is shown that the Friedman rule is the optimal monetary policy in a monopolistic banking economy, and the zero-inflation policy is optimal in a competitive banking economy under appropriate parameters. In addition, the combination of the Friedman rule and the discount window policy can achieve efficient allocation in both banking systems. [ABSTRACT FROM AUTHOR]

This paper examines the relief provided by the Home Owners' Loan Corporation (HOLC), a New Deal program that purchased and refinanced over 1 million distressed residential mortgages. I document that the HOLC paid relatively high prices for its mortgages, most likely in an effort to encourage lender participation and stimulate the housing market. The consequence was that lenders were able to remove poorly performing assets from their balance sheets at attractive prices. While this meant the HOLC's ability to seek principal reductions was somewhat limited, borrowers still received significant relief through the terms of the HOLC's more modern and forgiving mortgage contracts. [ABSTRACT FROM AUTHOR]

This paper uses disaggregate U.S. inflation data to evaluate explanations for the breakdown of the relationship between oil price shocks and consumer price inflation. A data set with measures of inflation, energy intensity, labor intensity, and sensitivity to monetary policy is constructed for 97 sectors that make up core CPI inflation. A comparison of the 1973-85 and 1986-2006 time periods reveals that substitution away from energy use in production and monetary policy were both important, with approximately two-thirds of the change in response of inflation to oil shocks being due to reduced energy usage, and one-third to monetary policy. We find no evidence that other factors, such as changes in wage rigidities or changes in the persistence of oil shocks, played a role. [ABSTRACT FROM AUTHOR]

This paper analyzes the importance of monetary and fiscal policy shocks in explaining U.S. macroeconomic fluctuations, and establishes new stylized facts. The novelty of our empirical analysis is that we jointly consider both monetary and fiscal policy, whereas the existing literature only focuses on either one or the other. Our main findings are twofold: fiscal shocks are relatively more important in explaining medium cycle fluctuations whereas monetary policy shocks are relatively more important in explaining business cycle fluctuations, and failing to recognize that both monetary and fiscal policy simultaneously affect macroeconomic variables might incorrectly attribute the fluctuations to the wrong source. [ABSTRACT FROM AUTHOR]

This paper proposes a parsimonious and model-consistent method for combining forecasts generated by structural microfounded models and judgmental forecasts. The method delivers along several dimensions. First, it improves the forecasting performance of the model. Second, it allows interpreting the judgmental forecasts through the lens of the model. Finally, it provides a framework to assess the informational content of the judgmental forecasters. I illustrate the proposed methodology with a real-time forecasting exercise using a simple neo-Keynesian dynamic stochastic general equilibrium model and the Survey of Professional Forecasters. [ABSTRACT FROM AUTHOR]

This paper presents a model to study the transmission of liquidity shocks across financial institutions through the creditor channel. In the model, a borrower institution obtains funds from a large institutional lender and small investors. When the large lender's asset market is hit by a liquidity shock, it might decide to withdraw funding extended to the borrower. The potential withdrawal by the large lender causes small investors to panic and to close positions even if the large lender does not. Facing funding problems, the borrower has to cut its activities, contributing to further shocks to the supply of market liquidity. The original shock is exacerbated, which reinforces withdrawals by all creditors. The model helps explain how the spreading of liquidity shocks from the broker-dealer sector to the hedge fund sector and the feedback contribute to a systemic crisis. [ABSTRACT FROM AUTHOR]

Increasingly many central banks announce likely paths for future policy rates. Recent experience suggests that market forward rates can differ substantially from those announced. Models commonly adopted in policy analysis ignore such differences. This paper studies a simple model that can capture deviations between announced paths and market forward rates. We detail the macroeconomic transmission of such deviations and show how the model can inform policy deliberations. [ABSTRACT FROM AUTHOR]

This paper checks whether the coefficient estimates of a famous dynamic stochastic general equilibrium (DSGE) model are robust to macroeconomic data revisions. The effects of revisions are captured by rerunning the estimation on a real-time data set compiled using the latest time series available each quarter from 1997 through 2015. Results show that estimates of the structural parameters are generally robust to changes in the data that have occurred over the past 20 years. By comparison, standard error estimates are more sensitive to revisions. The latter implies that judgments about the statistical significance of certain parameters depend on which data vintage is used for estimation. [ABSTRACT FROM AUTHOR]

This paper explores the effects of shifts in interest rates on corporate leverage and default in the context of a dynamic model in which the link between leverage and default risk comes from the lower incentives of overindebted entrepreneurs to guarantee firm survival. The need to finance new investment pushes firms' leverage ratio above some state-contingent target toward which firms gradually adjust through earnings retention. The response to interest rate rises and cuts is both asymmetric and heterogeneously distributed across firms. Our results help rationalize some of the evidence regarding the risk-taking channel of monetary policy. [ABSTRACT FROM AUTHOR]

King et al. () evaluate the empirical relevance of a class of real business cycle models with permanent productivity shocks by analyzing the stochastic trend properties of postwar U.S. macroeconomic data. They find a common stochastic trend in a three-variable system that includes output, consumption, and investment, but the explanatory power of the common trend drops significantly when they add money balances and the nominal interest rate. In this paper, we revisit the cointegration tests in the spirit of King et al., using improved monetary aggregates whose construction has been stimulated by the Barnett critique. We show that previous rejections of the balanced growth hypothesis and classical money demand functions can be attributed to mismeasurement of the monetary aggregates. [ABSTRACT FROM AUTHOR]

This paper develops an equilibrium model of a subprime mortgage market. Our goal is to offer a benchmark with which the recent subprime boom and bust can be compared. The model is tractable and delivers plausible orders of magnitude for borrowing capacities, as well as default and trading intensities. We offer simple explanations for several phenomena in the subprime market, such as the prevalence of teaser rates and the clustering of defaults. In our model, both nondiversifiable and diversifiable income risks reduce debt capacities. Thus, debt capacities need not be higher when a larger fraction of income risk is diversifiable. [ABSTRACT FROM AUTHOR]

ABSTRACT This paper studies the 'confidential holdings' of institutional investors, especially hedge funds, where the quarter-end equity holdings are disclosed with a delay through amendments to Form 13F and are usually excluded from the standard databases. Funds managing large risky portfolios with nonconventional strategies seek confidentiality more frequently. Stocks in these holdings are disproportionately associated with information-sensitive events or share characteristics indicating greater information asymmetry. Confidential holdings exhibit superior performance up to 12 months, and tend to take longer to build. Together the evidence supports private information and the associated price impact as the dominant motives for confidentiality. [ABSTRACT FROM AUTHOR]

In this paper, we consider various types of models where fiat money is used to facilitate trades, and investigate whether models with fiat money have the same equilibrium allocations. In particular, we investigate whether or not such models have a continuum of stationary equilibria. We first present a dynamic centralized auction market model with money, which has not been investigated in the literature. We compare its outcome with that of Walrasian models with cash-in-advance constraints, and show that the outcomes are very different: the Walrasian markets model has determinate stationary equilibria and the auction markets model has a continuum of stationary equilibria. Moreover, we also build models on decentralized auction markets and on decentralized markets with bargaining, and obtain results similar to those of the dynamic centralized auction markets model. [ABSTRACT FROM AUTHOR]

This paper examines the long-run relation between prices and rents for houses in Amsterdam from 1650 to 2005. We estimate the deviation of house prices from fundamentals and find that these deviations can be persistent and long-lasting. Furthermore, we look at the feedback mechanisms between housing market fundamentals and prices, and find that market correction of the mispricing occurs mainly through prices not rents. This correction back to equilibrium, however, can take decades. [ABSTRACT FROM AUTHOR]

In this paper, we study the Calvo pricing models with finished goods inventory investment to demonstrate that the current inflation can be expressed as a function of the marginal cost of sales, not the marginal production cost, and expected future inflation. Under the assumption that the true aggregate marginal costs are not observable in actual data, we make use of equilibrium conditions for aggregate finished goods inventories to measure the time series of marginal costs, thereby leading to the construction of inflation series on the basis of the Phillips curve. Our results indicate the possibility of a successful fit of the empirical New Keynesian Phillips curve without relying on unit labor cost-a conventional measure of marginal production cost in the literature. [ABSTRACT FROM AUTHOR]

ABSTRACT We analyze the investment behavior of affiliated funds of mutual funds (AFoMFs), which are mutual funds that can only invest in other funds in the family, and are offered by most large families. Though never mentioned in any prospectus, we discover that AFoMFs provide an insurance pool against temporary liquidity shocks to other funds in the family. We show that, though the family benefits because funds can avoid fire sales, the cost of this insurance is borne by the investors in the AFoMFs. The paper thus uncovers some of the hidden complexities of fiduciary responsibility in mutual fund families. [ABSTRACT FROM AUTHOR]

The recent crisis has brought to the fore the cyclical properties of banking regulation. Countercyclical buffers and enhanced capital requirements meant to stabilize banks' balance sheets across the cycle are not costless, and a delicate balance needs to be reached between providing incentives to generate value and discouraging excessive risk taking. The paper develops a model in which, in contrast with Modigliani-Miller, outside equity and capital requirements matter. It analyses banking regulation in the presence of macroeconomic shocks and studies the desirability of self-insurance mechanisms such as countercyclical capital buffers or dynamic provisioning, as well as 'macro-hedges' such as CoCos and capital insurance. [ABSTRACT FROM AUTHOR]

In this paper, I estimate a simple Bayesian learning model to expectations data from the Survey of Professional Forecasters. I reformulate the model in terms of forecast revisions, which allows one to abstract from differences in priors and to focus the analysis on the relationship between news and revisions. The empirical analysis shows that there is significant heterogeneity in the interpretation of news among forecasters, in particular at longer horizons, while it decreases closer to the forecast target date. The results also indicate a positive relationship between prior sentiment and interpretation of the signal, in the sense that relatively optimistic (pessimistic) forecasters are likely to believe that the signal under (over) estimates the future realization and assign it a low (high) weight in the forecast revision. [ABSTRACT FROM AUTHOR]

This paper investigates the roles of the nominal exchange rate and relative prices in restoring purchasing power parity (PPP) by estimating their dynamics with a bivariate threshold vector error correction model. Our empirical results suggest a threshold cointegrating relationship between the nominal exchange rate and relative prices. However, these two variables play different roles in restoring PPP. The nominal exchange rate adjusts to restore PPP only outside the threshold band. Within the band, PPP is restored mainly through adjustments in relative prices. [ABSTRACT FROM AUTHOR]

Abstract: The inability of a simple real business cycle model to predict a rise in consumption in response to increased government expenditures, observed in many empirical studies, has stimulated the development of alternative theories of government spending shocks. Using the Bayesian approach, we evaluate the quantitative performance of five extant models, and find that neither of the considered transmission mechanisms for government spending helps improve the fit of the baseline model. Moreover, we find that consumption decreases in all estimated models in response to a rise in government spending. [ABSTRACT FROM AUTHOR]

I implement and compare five solution methods for a benchmark heterogeneous firms model with lumpy capital adjustment and aggregate uncertainty. The Krusell-Smith algorithm performs best within a group of methods using projection in the aggregate states. Another technique, Parameterization plus Perturbation, is much faster and performs best within a group of methods using perturbation in aggregates. However, projection and perturbation have nonoverlapping strengths and weaknesses. I highlight the resulting trade-offs with several model extensions. I recommend that researchers apply projection methods to cases with large shocks or nonlinear dynamics, while cases with explicitly distributional channels at work favor perturbation. [ABSTRACT FROM AUTHOR]

We show that dynamic stochastic general equilibrium (DSGE) models with housing and collateralized borrowing predict a fall in house prices following positive government spending shocks. By contrast, we show that house prices in the United States rise persistently after identified positive government spending shocks. We clarify that the incorrect house price response is due to a general property of DSGE models-approximately constant shadow value of housing-and that modifying preferences and production structure cannot help in obtaining the correct house price response. Properly accounting for the empirical evidence on government spending shocks and house prices using a DSGE model therefore remains a significant challenge. [ABSTRACT FROM AUTHOR]

Most dynamic stochastic general equilibrium (DSGE) models with a housing market do not explicitly include a rental market and assume a tight mapping between house prices and rents over the business cycle. However, rents are much smoother than house prices in the data. We match this feature of the data by adding both an owner-occupied housing market and a rental market in a standard DSGE model. The intertemporal preference shock accounts for more than half of the variation in house prices and contributes to residential investment fluctuations through the liquidity constraint, and nominal rigidity in rental contracts captures the variation in the price-rent ratio. [ABSTRACT FROM AUTHOR]

We develop a model of a two-sided asset market in which trades are intermediated by dealers and are bilateral. Dealers compete to attract order flow by posting the terms at which they execute trades-which can include prices, quantities, and execution speed-and investors direct their orders toward dealers who offer the most attractive terms. We characterize the equilibrium in a general setting, and we illustrate theoretically and numerically how the model can account for several important trading patterns in over-the-counter markets, which do not emerge from existing models. [ABSTRACT FROM AUTHOR]

It is most important for monetary policy to track the natural rate of interest when interest rates take large and sustained swings away from their long-run equilibrium values. Here, we study two models: a standard New Keynesian model and one in which government bonds provide liquidity. Policy rules that cannot track the natural rate perform poorly in both models, but are especially bad in the second because of sustained movements in the natural rate induced by fiscal shocks. First difference rules, on the other hand, do surprisingly well. When model uncertainty is taken into account, the dominance of the first difference rule is even more pronounced. [ABSTRACT FROM AUTHOR]

This article shows that the 'risk premium' shock in Smets and Wouters (2007) can be interpreted as a structural shock to the demand for safe and liquid assets such as short-term U.S. Treasury securities. Several implications of this interpretation are discussed. [ABSTRACT FROM AUTHOR]

Recent studies document the deteriorating performance of forecasting models during the Great Moderation, which conversely implies that forecastability was higher in the preceding era when the economy was unexpectedly volatile. We explain this phenomenon in the context of equilibrium indeterminacy in dynamic stochastic general equilibrium (DSGE) models. We first analytically show that a model under indeterminacy exhibits richer dynamics that can improve forecastability. Then, using a sticky-price DSGE model, we numerically demonstrate that indeterminacy arising from passive monetary policy generates persistent dynamics that lead to superior forecastability. We also point out the possibility that forecastability under indeterminacy deteriorates when the degree of uncertainty about sunspot fluctuations is large. [ABSTRACT FROM AUTHOR]

We analyze the relationship between asset prices and the trade balance estimating a Bayesian VAR for a broad set of 38 industrialized and emerging market countries. To derive model-based identifying restrictions, we model asset price shocks as news shocks about future productivity in a two-country dynamic stochastic general equilibrium model. Such shocks are found to exert sizable effects on the trade balance. Moreover, the effects are highly heterogeneous across countries. For instance, following a news shock that implies on impact a 10% increase in domestic equity prices relative to the rest of the world, the U.S. trade balance will worsen by up to 1.0 percentage points, but much less so for most other economies. We find that this heterogeneity appears to be linked to the financial market depth and equity home bias of countries. Moreover, the channels via wealth effects and via the real exchange rate are important for understanding the heterogeneity in the transmission. [ABSTRACT FROM AUTHOR]