This paper argues that the primary objective of monetary policy should be long run price stability or at least a low average rate of in°ation. But there is also a welfare improving role for monetary policy in helping the economy adjust to nonpolicy shocks. This gives rise to a fundamental tension in the conduct of monetary policy. Understanding this tension is central to interpreting the qualitative properties of actual monetary policy, for evaluating its e®ects and for thinking about alternative institutions that would lead to better monetary policy. Is there a core of practical macroeconomics that we should all believe? 1 Given my limited space constraints, I won't try to discuss a top ten list of eternal macro truths. Nor will I discuss the importance of modelling macro phenomena using quantitative general equilibrium models. Instead I will approach the question from the perspective of stabilization policy. So de¯ned, my answer to the question is: Yes, there is a core of practical macro. And as regards stabilization policy, most of it has been learned in the past twenty eight years as

This paper analyzes the role of variable capital-utilization rates in propagating shocks over the business cycle. The model on which our analysis is based treats variable capital-utilization rates as a form of factor-hoarding. We argue that variable capital-utilization rates are a quantitatively important source of propagation to business-cycle shocks. With this additional source of propagation, the volatility of exogenous technology shocks needed to explain the observed variability in aggregate U.S. output is significantly reduced relative to standard real-business-cycle models.

Hours worked and the return to working are weakly correlated. Traditionally, the ability to account for this fact has been a litmus test for macroeconomic models. Existing real-business-cycle models fail this test dramatically. We modify prototypical real-business-cycle models by allowing government consumption shocks to influence labor-market dynamics. This modification can, in principle, bring the models into closer conformity with the data. Our empirical results indicate that it does.

This paper studies how the impact of monetary policy depends on the distribution of savings from refinancing mortgages. We show that the efficacy of monetary policy is state dependent, varying in a systematic way with the pool of potential savings from refinancing. We construct a quantitative dynamic life-cycle model that accounts for our findings and use it to study how the response of consumption to a change in mortgage rates depends on the distribution of savings from refinancing. These effects are strongly state dependent. We also use the model to study the impact of a long period of low interest rates on the potency of monetary policy. We find that this potency is substantially reduced both during the period and for a substantial amount of time after interest rates renormalize.

We assess the importance of nominal rigidities using a new weekly scanner dataset. We find that nominal rigidities take the form of inertia in reference prices and costs, defined as the most common prices and costs within a given quarter. Reference prices are particularly inertial and have an average duration of roughly one year, even though weekly prices change roughly once every two weeks. We document the relation between prices and costs and find sharp evidence of state dependence in prices. We use a simple model to argue that reference prices and costs are useful statistics for macroeconomic analysis.

The carry trade strategy involves selling forward currencies that are at a forward premium and buying forward currencies that are at a forward discount. We compare the payoffs to the carry trade applied to two different portfolios. The first portfolio consists exclusively of developed country currencies. The second portfolio includes the currencies of both developed countries and emerging markets. Our main empirical findings are as follows. First, including emerging market currencies in our portfolio substantially increases the Sharpe ratio associated with the carry trade. Second, bid-ask spreads are two to four times larger in emerging markets than in developed countries. Third and most dramatically, the payoffs to the carry trade for both portfolios are uncorrelated with returns to the U.S. stock market.