Monetary policy makers are uncertain about the state of the economy and learn from the economy's reaction to policy. Private agents, however, anticipate any systematic attempt to incorporate this information into future policy. We analyze this feedback in the context of a monetary authority's attempt to stimulate an economy in recession. We show that modest stimuli may prove ineffectual. If small reductions in interest rates are unlikely to promote a response, then they may be followed by further cuts. A vicious circle develops in which the expectation that the policy could fail leads investors to delay investment thereby promoting failure.

We present a three-stage model of market dynamics. In the first stage, routine behavior tends to keep information of common interest trapped in private hands. In the second stage, private information reaches a threshold that triggers some agents to alter their behavior; these actions release information to the market. The final stage involves the market's response to this news as other participants react to the initial departure from routine behavior. We present an application to industry investment. We also outline applications to the international debt crisis, to bank runs, and to political upheavals.

The literature on the aggregation of (S, s) policies has ignored the impact of aggregate behavior on the individual's optimization problem. In the case of pricing, the feedback effects are clear. Not only do pricing strategies determine the evolution of the price level, but the evolution of the price level also influences the optimal pricing strategies. In this paper, we provide a consistent treatment of aggregation and optimization. We use this model to analyze three issues in the menu cost pricing literature: the relationship between strategic complementarity and the real effects of money; the relationship between the variance of the money supply and the correlation between money and output; and the relationship between the cost of price adjustment and the size of price adjustment. QUESTIONS CONCERNING THE DYNAMICS of aggregate variables such as prices, employment, investment, and consumption represent the core of business cycle analysis. One striking feature of these variables is the radical difference between properties of these aggregates and the nature of the individual behavior that underlies them. The behavior of a firm's prices, investment and employment, and the behavior of an individual's consumption all involve frictional elements that lead to discrete adjustment at the microeconomic level. Heterogeneity among individuals, however, tends to smooth the behavior of the corresponding aggregates. In recent years, a large body of research has developed to examine the manner in which microeconomic frictions influence aggregate dynamics. One of the centerpieces of this research has been the (S, s) model developed by Arrow, Harris, and Marschak (1951). The key element of this model is the state dependence of individual decisions. Agents act when a state variable crosses some critical threshold which balances the cost and benefits of adjustment. The aggregate implications of this form of microeconomic behavior have been analyzed by Blinder (1981), Caplin (1985), and Mosser (1991) in the context of inventory dynamics; by Caplin and Spulber (1987), Caballero and Engel (1991, 1993), and Caplin and Leahy (1991) in the context of prices; and by Bertola and Caballero (1990), Caballero (1993), and Eberly (1994) in the context of con- sumer durables. One of the most limiting aspects of these models is that they focus exclusively on the impact that microeconomic inertia has on aggregate dynamics. They 1We would like to thank Michael Harrison, loannis Karatzas, John Leahy Sr., Andreu Mas-Colell, a co-editor and four anonymous referees for helpful discussions and comments, and the National Science Foundation and the Sloan Foundation for financial support.

The authors present a three-stage model of market dynamics. In the first stage, routine behavior tends to keep information of common interest trapped in private hands. In the second stage, private information reaches a threshold that triggers some agents to alter their behavior; these actions release information to the market. The final stage involves the market's response to this news as other participants react to the initial departure from routine behavior. The authors present an application to industry investment. They also outline applications to the international debt crisis, to bank runs, and to political upheavals.

We develop an analytically tractable Phillips curve based on state‐dependent pricing. We consider a local approximation around a zero inflation steady state and introduce infrequent idiosyncratic shocks. The resulting Phillips curve is a simple variant of the conventional time‐dependent Calvo formulation with important differences. First, the model is able to match the micro evidence on the magnitude and timing of price adjustments. Second, our state‐dependent model exhibits greater flexibility in the aggregate price level than the time‐dependent model. With real rigidities present, however, our model can exhibit nominal stickiness similar to a conventional time‐dependent model.

In welfare theory it is standard to pick the consumption stream that maximizes the welfare of the representative agent. We argue against this position, and show that a benevolent social planner will generally place a greater weight on future consumption than does the representative agent. Our analysis has immediate implications for public policy: agents discount the future too much and the government should promote future oriented policies.

Prior research has established that consumption falls significantly at retirement. What is not known is the extent to which this fall is anticipated during the working years. Using data from a new survey, we show that many working households do expect a considerable fall in consumption when they retire. In fact, those who are already retired report significantly smaller falls in consumption than are expected by those who are still working.

We study the cyclical effects of the timing of durable goods purchases in a general equilibrium model in which both durable and non-durable goods are consumed and the durable good is lumpy, At the microeconomic level, the timing of durable goods purchases supplies some insulation for nondurable consumption over the cycle. At the macroeconomic level, the timing decisions tend to amplify and propagate wealth and income shocks. Our model also allows for endogenous price determination. When the price of the durable changes due to inflexibility of workers between sectors, the effect of adverse shocks is even stronger and longer.