In 2004 all publications will carry a motif taken from the €100 banknote. This paper can be downloaded without charge from

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In 2008 all ECB publications feature a motif taken from the €10 banknote. This paper can be downloaded without charge from

We present an equilibrium life-cycle model of housing where nonconvex adjustment costs lead households to adjust their housing choice infrequently and by large amounts when they do so. In the cross-sectional dimension, the model matches the wealth distribution, the age profiles of consumption, homeownership, and mortgage debt, and data on the frequency of housing adjustment. In the time-series dimension, the model accounts for the procyclicality and volatility of housing investment, and for the procyclical behavior of household debt. We use a calibrated version of our model to ask the following question: what are the consequences for aggregate volatility of an increase in household income risk and a decrease in downpayment requirements? We distinguish between an early period, the 1950s through the 1970s, when household income risk was relatively small and loan-to-value ratios were low, and a late period, the 1980s through today, with high household income risk and high loan-to-value ratios. In the early period, precautionary saving is small, wealth-poor people are close to their maximum borrowing limit, and housing investment, homeownership and household debt closely track aggregate productivity. In the late period, precautionary saving is larger, wealth-poor people borrow less than the maximum and become more cautious in response to aggregate shocks. As a consequence, the

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Istudytheeffects of a lack of common knowledge on nominal adjustment in a dynamic price-setting game with incomplete information. In particular, I show how the speed of price adjustments following a nominal or real shock depends on the information structure among pricesetters. The provision of public information leads to a reduction of higher-order uncertainty, and hence to more rapid price adjustments, but it potentially comes at the cost of an increased exposure to informational noise. I extend my analysis to allow for other disturbances, showing that higher-order uncertainty may account for the persistence of any kind of shock. Finally, I reconsider the role of monetary policy and discuss how the central bank’s policy actions may act as a focal point for market beliefs and hence affect nominal and real adjustment through its "coordination effect".

This paper presents evidence on the lag between monetary policy actions and the response of inflation in the euro area as a whole as well as in Germany, Italy and France. In line with previous findings for the US and the UK, results here show that this lag is longer than one year both in the euro area and in individual countries, and that a lag of this length has existed in Europe at least since the collapse of the Bretton Woods system, despite the numerous changes in European monetary policy regime thereafter. Results based on alternative definitions of inflation persistence support these findings, although, they suggest that at the country level, a drop in German inflation persistence and a sizeable shift in the mean of inflation#particularly in Italy and France#are beyond doubt. The paper shows that euro area inflation persistence could well be an intrinsic phenomenon rather than a `statistical fluke' due to aggregation. Key Words: Euro area, Europe, inflation persistence, HICP, monetary transmission, aggregation bias JEL Classification Codes: E4-E5 S Non-Technical Summary The launch of the European Monetary Union has created an entirely new economic area. The exercise of monetary policy in such a new environment is a formidable task for European policymakers both because comprehensive and harmonised data for the area have not been collected in the past, and because the functioning of the area economy as a unified entity is yet largely unknown. One matter on which uncertainty facing policymakers is particularly acute is that of the lag in effect of monetary policy at the area level. In general, the ability to quantify and, hence, model the sluggish response of inflation to changes in monetary conditions is important for monetary policymakers because it helps them u...

Abstract. This paper argues that limited asset market participation before 1980 in the US (and the change thereof) is crucial in explaining macroeconomic performance and monetary policy conduct. Our model predicts that when participation rates change from low to high the slope of the IS curve changes from positive (’non-Keynesian’) to negative (standard). We provide empirical evidence for such a change in the US around 1980. In the non-Keynesian case, a passive monetary policy rule ensures equilibrium determinacy and maximizes welfare. Hence, Fed policy was closer to optimal than conventional wisdom dictates; policy may have changed endogenously from passive to active due to the change in asset market participation. Given the structure, fundamental shocks are enough to generate most features of the Great Inflation despite ’good ’ policy. (JEL E31; E32, E44; E58; E65.) It is widely documented that during the late 1960s and throughout the 1970s, inflation was high and volatile, and a few recessions hit the U.S. economy. Most of the theories put forward to explain this historical record rely on ’mistakes ’ of

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