Standard economic theories of asset markets assume that assets are valued entirely for the consumption streams they can finance. This paper examines the introduction of the demand for status (as a function of wealth) into a model of uninsurable idiosyncratic risk—the “spirit of capitalism” (“soc”) assumption. We find that soc preferences lead to less inequality in wealth; placing wealth into the utility function leads to a shrinking wealth distribution. The drop in wealth concentration is smaller if the utility function implies status is a luxury good, but no parametrization leads to higher wealth Gini coefficients than the benchmark case. We then consider the consequences of revenue-neutral tax reforms with and without soc preferences, finding that they make little difference for this policy experiment.

The Forward Premium Puzzle is widely considered to indicate inefficiency in the foreign exchange market. This paper proposes a resolution of the puzzle using recursive least squares learning. Risk-neutral agents learn the unknown parameters, underlying the exchange rate generation process, using constant-gain recursive least squares. Simulations using plausible model parameter values replicate the anomaly along with other observed empirical features of the forward and spot exchange rate data. Estimates of parameter values from data support the model assumptions and justify the use of constant-gain learning. The conclusion is that the puzzle is not necessarily a reflection of inefficiency.

This paper shows that the optimal monetary policies recommended by New Keynesian models still imply a large amount of inflation risk. We calculate the term structure of inflation uncertainty in New Keynesian models when the monetary authority adopts the optimal policy. When the monetary policy rules are modified to include some weight on a price path, the economy achieves equilibria with substantially lower long-run inflation risk. With either sticky prices or sticky wages, a price path target reduces the variance of inflation by an order of magnitude more than it increases the variability of the output gap.

This paper extends the Diamond-Mortensen-Pissarides (DMP) matching model with endogenous job destruction by introducing postmatch labor turnover costs. We consider training and separation costs that create heterogeneity among workers. In particular, there are two types of employed workers: (i) new entrants who need training in order to become fully productive, and (ii) incumbents who are fully productive and whose departure from the firm imposes costs on it. We find that our calibrated model, relative to the standard DMP model, comes closer to the data regarding the volatility of vacancies and unemployment without introducing unrealistic sensitivity to policy changes. Moreover, our extended model nearly reproduces the downward-sloping Beveridge curve, which is unusual when endogenous job destruction exists in this type of model.

This paper introduces a method of optimization in infinite-horizon economies based on the theory of correspondences. The proposed approach allow us to study time-separable and non-time-separable dynamic economic models without resorting to fixed point theorems or transversality conditions. When our technique is applied to the standard time-separable model it provides an alternative and straightforward way to derive the common recursive formulation of these models by means of Bellman equations.

The banking literature following Diamond and Dybvig [Journal of Political Economy 85, 191–206 (1983)] has assumed that all depositors are ex ante identical. This paper relaxes this assumption by introducing two types of agents. Whereas some agents are uncertain about their liquidity needs at the time they deposit in banks, other agents know exactly at what time they will want to withdraw their funds. Agents who know ex ante that they will want to withdraw in the short term will tend to disrupt the ability of a bank to serve customers who are uncertain about their timing of withdrawal. An adverse selection problem arises, where short-term deposits have the incentive to join the financial system and limit, or completely do away with, banks' liquidity provision service. On the other hand, potentially beneficial long-term funds will not be deposited in banks. Further, when unpredicted short-term withdrawal needs are sufficiently high, bank reserves are exhausted, and long-term investments need to be disrupted, causing a banking crisis.

I demonstrate that the precise timing of financial markets and goods markets in a simple cash good/credit good model does not matter for the main results in the Ramsey literature on optimal fiscal and monetary policy. In Ramsey models based on Lucas and Stokey [Journal of Monetary Economics 12, 55–93 (1983)] and Chari, Christiano, and Kehoe [Journal of Money, Credit, and Banking 23, 519–539 (1991)], nominal money holdings are freely adjustable in response to shocks in the period in which they will be used to purchase consumption. In contrast, under Svensson [Journal of Political Economy 93, 919–944 (1985)] timing, nominal balances cannot be adjusted in the period they will be used. The broad finding is that benchmark Ramsey results are not very sensitive to this slight, ultimately ad hoc, modification. In particular, optimal inflation continues to display very high variability just as in the original models, although this can differ depending on exactly which exogenous processes are driving the economy. That the basic results in the Ramsey literature are not sensitive to the choice of cash/credit timing is reassuring as Ramsey analysis is applied to an ever-expanding set of model environments.