We estimate a two-country open economy version of the New Keynesian dynamic stochastic general equilibrium model for the United States and the Euro area, using Bayesian techniques that allow for both determinacy and indeterminacy of the equilibrium. Empirical analysis shows that the worldwide equilibrium is indeterminate due to a passive monetary policy in the Euro area, even if U.S. policy is aggressive enough. We demonstrate that the impulse responses under indeterminacy exhibit dynamics different from those under determinacy and that sunspot shocks affect the Euro economy to a substantial degree, whereas the transmission of sunspots to the United States is limited.

Housing is an important component of the consumption basket. Because both rental prices and goods prices are sticky, the literature suggests that optimal monetary policy should stabilize both types of prices, with the optimal weight on rental inflation proportional to the housing expenditure share. In a two-sector DSGE model with sticky rental prices and goods prices, however, we find that the optimal weight on rental inflation in the Taylor rule is small—much smaller than that implied by the housing expenditure share. We show that the asymmetry in policy responses to rent inflation versus goods inflation stems from the asymmetry in factor intensity between the two sectors.

The emergence of fiat money is studied in a multiple-matching environment in which exchange is organized around trading posts and prices are determined with a dynamic monopolistically competitive framework. Each household consumes a bundle of commodities and has a preference for consumption variety. We determine the endogenous organization of exchange between firms and shoppers, the means of factor payment (remuneration), and the prices at which these trades occur. We verify that the endogenous linkage of factor payments with the medium of exchange can lead to a monetary equilibrium outcome where only fiat money trades for goods, an ex ante feature of cash-in-advance models. We also examine the long-run effects of money growth on equilibrium exchange patterns. A key finding, consistent with documented hyperinflationary episodes, is that a sufficiently rapid expansion of the money supply leads to the gradual emergence of barter, where sellers accept both goods and cash payments and workers receive part of their remuneration in goods.

The paper looks at the role of inventories in U.S. cycles and fluctuations. It concentrates on the goods-producing sector and constructs a model that features both input and output inventories. A range of shocks are present in the model, including sales, technology, and inventory cost shocks. It is found that the presence of inventories does not change the average goods sector–cycle characteristics in the United States very much. The model is also used to examine whether new techniques for inventory control might have been an important factor contributing to the decline in the volatility of U.S. GDP growth. It is found that these would have had little impact upon the level of volatility.

In his monograph The Conquest of American Inflation (Princeton, NJ: Princeton University Press, 1999), Sargent suggests that the sharp reduction in U.S. inflation that took place under Volker may vindicate the type of econometric policy evaluation famously criticized by Lucas (Carnegie–Rochester Conference Series on Public Policy, 19–46, 1976). At the core of this vindication story is the escape dynamics, recurrent sliding away from the path leading to the time-consistent suboptimal equilibrium level of inflation and toward the low-inflation, optimal, time-inconsistent Ramsey outcome: by recurrently estimating a reduced-form model, in fact, the policy maker could periodically learn an approximate version of the natural rate hypothesis and therefore be induced to disinflate the economy. Two elements seem important in this story: the type of model used by the policy maker to represent the economy, whether structural or reduced-form, and the policy specification, whether derived taking the private sector's expectations as given or as endogenous to the policy design. Although Sargent (1999) stresses the first element, we find that it is instead the second aspect that is crucial to generate recurrent periods of low inflation: the policy maker has to recognize the endogeneity of the private sector's expectations and refrain from exploiting ephemeral short-run trade-offs between inflation and unemployment.

This paper tests whether increases and decreases in labor taxes have an asymmetric impact on unemployment. Using a panel of 16 OECD countries over the period 1970–2005, we estimate a panel unobserved-component model to account for the fact that unemployment rates and labor taxes are nonstationary but not cointegrated. We find a positive impact of labor tax increases on unemployment in European and Nordic countries, whereas for labor tax decreases, no significant impact is found in these countries. For Anglo-Saxon countries, neither increases nor decreases in labor taxes have any impact on unemployment.

This paper develops a general technique for the computation of comparative dynamics in perfect-foresight discrete-time models. The method developed here is both applicable and general; it can be used to analyze the effects of the perturbation of parameters on endogenous variables and the welfare of an economic system derived from more general multisector models. It is neither restricted to the system's dimensions nor restricted by the assumption of distinct eigenvalues in the system.

The monthly Current Population Survey (CPS), with its annual demographic March supplement, and the Panel Study of Income Dynamics (PSID) are the leading sources of data on worker reallocation across occupations, industries, and firms. Much of the active current research is based on these data. In this paper, we contrast these data sets as sources of data for measuring the dynamics of worker mobility. We find that (i) (March) CPS data are characterized by a substantial amount of noise when it comes to identifying occupational and industry switches; (ii) March CPS data provide a poor measure of annual occupational mobility and, instead, most likely measure mobility over a much shorter period; (iii) (the changes in) the procedure to impute missing data have a dramatic effect on the interpretation of the CPS data in, e.g., the trend in occupational mobility. The most important shortcomings of the PSID are the facts that (i) occupational and industry affiliation data are available in most years at an annual frequency; (ii) the PSID's sample, by design, excludes immigrants arriving in the United States after 1968; (iii) the Retrospective Occupation–Industry Files with reliable occupation and industry affiliation data are available only until 1980.