This paper develops a tractable version of the Lucas and Prescott (1974) search model. Each of a continuum of industries produces a heterogeneous good using a production technology that is continually hit by idiosyncratic shocks. In response to adverse shocks, some workers search for new industries while others are rest unemployed, waiting for their industry's condition to improve. We obtain closed-form expressions for key aggregate variables and use them to evaluate the model's quantitative predictions for unemployment and wages. Both search and rest unemployment are important for understanding the behavior of wages at the industry level.

We derive a lower bound for the volatility of the permanent component of investors' marginal utility of wealth or, more generally, asset pricing kernels. The bound is based on return properties of long-term zero-coupon bonds, risk-free bonds, and other risky securities. We find the permanent component of the pricing kernel to be very volatile; its volatility is about at least as large as the volatility of the stochastic discount factor. A related measure for the transitory component suggest it to be considerably less important. We also show that, for many cases where the pricing kernel is a function of consumption, innovations to consumption need to have permanent effects.

We introduce a new equilibrium concept and study its efficiency and asset pricing implications for the environment analyzed by Kehoe and Levine (1993) and Kocherlakota (1996). Our equilibrium concept has complete markets and endogenous solvency constraints. These solvency constraints prevent default at the cost of reducing risk sharing. We show versions of the welfare theorems. We characterize the preferences and endowments that lead to equilibria with incomplete risk sharing. We compare the resulting pricing kernel with the one for economies without participation constraints: interest rates are lower and risk premia depend on the covariance of the idiosyncratic and aggregate shocks. Additionally, we show that asset prices depend only on the valuation of agents with substantial idiosyncratic risk.

We propose an analytical method to analyze the propagation of an aggregate shock in a broad class of sticky‐price models. The method is based on the eigenvalue‐eigenfunction representation of the dynamics of the cross‐sectional distribution of firms' desired adjustments. A key novelty is that we can approximate the whole profile of the impulse response for any moment of interest in response to an aggregate shock (any displacement of the invariant distribution). We present several applications for an economy with low inflation and idiosyncratic shocks. We show that the shape of the impulse response of the canonical menu cost model is fully encoded by a single parameter, just like the Calvo model, although the shapes are very different. A model with a quadratic hazard function, arguably a good fit to the micro data on price setting, yields an impulse response that is close to the canonical menu cost model.

We document cash management patterns for households that are at odds with the predictions of deterministic inventory models that abstract from pre-cautionary motives. We extend the Baumol-Tobin cash inventory model to a dynamic environment that allows for the possibility of withdrawing cash at random times at a low cost. This modification introduces a precautionary motive for holding cash and naturally captures developments in withdrawal technology, such as the increasing diffusion of bank branches and ATM termi-nals. We characterize the solution of the model and show that qualitatively it is able to reproduce the empirical patterns. Estimating the structural pa-rameters we show that the model quantitatively accounts for key features of the data. The estimates are used to quantify the expenditure and interest rate elasticity of money demand, the impact of financial innovation on money demand, the welfare cost of inflation, the gains of disinflation and the benefit of ATM ownership.

We show that optimal monetary and fiscal policies are time consistent for a class of economies often used in applied work, economies appealing because they are consistent with the growth facts. We establish our results in two steps. We first show that for this class of economies, the Friedman rule of setting nominal interest rates to zero is optimal under commitment. We then show that optimal policies are time consistent if the Friedman rule is optimal. For our benchmark economy in which the time consistency problem is most severe, the converse also holds: if optimal policies are time consistent, then the Friedman rule is optimal.

We study the propagation of monetary shocks in a sticky‐price general equilibrium economy where the firms' pricing strategy features a complementarity with the decisions of other firms. In a dynamic equilibrium, the firm's price‐setting decisions depend on aggregates, which in turn depend on the firms' decisions. We cast this fixed‐point problem as a Mean Field Game and prove several analytic results. We establish existence and uniqueness of the equilibrium and characterize the impulse response function (IRF) of output following an aggregate shock. We prove that strategic complementarities make the IRF larger at each horizon. We establish that complementarities may give rise to an IRF with a hump‐shaped profile. As the complementarity becomes large enough, the IRF diverges, and at a critical point there is no equilibrium. Finally, we show that the amplification effect of the strategic interactions is similar across models: the Calvo model and the Golosov–Lucas model display a comparable amplification, in spite of the fact that the non‐neutrality in Calvo is much larger.