Charles T. Carlstrom |

Senior Economic Advisor

Charles T. Carlstrom, Senior Economic Advisor

Charles Carlstrom is an economic advisor in the Research Department of the Federal Reserve Bank of Cleveland. In this role, he conducts research and authors articles on monetary economics and public finance.

Prior to joining the Bank in 1987, Dr. Carlstrom taught economics at The University of North Carolina at Chapel Hill.

A native of San Diego, Dr. Carlstrom earned a bachelor's degree from the University of Chicago and a master's degree and doctorate in economics from the University of Rochester, New York. Dr. Carlstrom is a member of the American Economics Association.

  • Fed Publications
  • Other Publications
Title Date Publication Author(s) Type

 

October, 2014 Federal Reserve Bank of Cleveland, working paper no. 14-20 ; Timothy S Fuerst; Matthias Paustian; Working Papers
Abstract: This paper derives the optimal lending contract in the financial accelerator model of Bernanke, Gertler and Gilchrist (1999), hereafter BGG. The optimal contract includes indexation to the aggregate return on capital, household consumption, and the return to internal funds. This triple indexation results in a dampening of fluctuations in leverage and the risk premium. Hence, compared with the contract originally imposed by BGG, the privately optimal contract implies essentially no financial accelerator. [A previous version of this paper was titled "Privately Optimal Contracts and Suboptimal Outcomes in a Model of Agency Costs" and posted as Federal Reserve Bank of Cleveland, working paper no. 1239R.]

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October, 2014 Federal Reserve Bank of Cleveland, working paper no. 14-19 ; Timothy S Fuerst; Matthias Paustian; Working Papers
Abstract: This paper develops a model of segmented financial markets in which the net worth of financial institutions limits the degree of arbitrage across the term structure. The model is embedded into the canonical Dynamic New Keynesian (DNK) framework. We estimate the model using data on the term premium. Our principal results include the following. First, the estimated segmentation coefficient implies a nontrivial effect of central bank asset purchases on yields and real activity. Second, there are welfare gains to having the central bank respond to the term premium, eg., including the term premium in the Taylor rule. Third, a policy that directly targets the term premium sterilizes the real economy from shocks originating in the financial sector. A term premium peg can have significant welfare effects.

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2014-08 ; Timothy S Fuerst; Economic Commentary
Abstract: A Taylor rule captures the historical behavior of the federal funds rate better when it also includes a partial-adjustment factor. Typically, the type of partial adjustment added is consistent with the FOMC avoiding large jumps in the level of the funds rate. We add another type of partial adjustment—consistent with the FOMC avoiding changes in the pace of change—and improve the rule's historical fit.

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2014-02 ; Saeed Zaman; Economic Commentary
Abstract: A standard Taylor rule, which expresses the federal funds rate as a function of inflation, the unemployment gap, and the past federal funds rate, tracks the federal funds rate well over time. We improve the fit by adding employment growth. Then we evaluate the effectiveness of that rule in a new way—by how accurately it predicts whether the FOMC moves the fed funds rate at its next meeting. It does pretty well, predicting nearly 70 percent of the time correctly.

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December, 2012 Federal Reserve Bank of Cleveland, working paper no. 12-39r ; Timothy S Fuerst; Matthias Paustian; Working Papers
Abstract: This paper derives the privately optimal lending contract in the celebrated financial accelerator model of Bernanke, Gertler and Gilchrist (1999). The privately optimal contract includes indexation to the aggregate return on capital, household consumption, and the return to internal funds. Although privately optimal, this contract is not welfare maximizing as it leads to a sub-optimally high price of capital. The welfare cost of the privately optimal contract (when compared to the planner outcome) is significant. A menu of time-varying taxes and subsidies can decentralize the planner's allocations.

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December, 2012 Federal Reserve Bank of Cleveland, working paper no. 12-35 ; Timothy S Fuerst; Matthias Paustian; Working Papers
Abstract: This paper revisits the size of the fiscal multiplier. The experiment is a fiscal expansion under the assumption of a pegged nominal rate of interest. We demonstrate that a quantitatively important issue is the articulation of the exit from the policy experiment. If the monetary-fiscal expansion is stochastic with a mean duration of T periods, the fiscal multiplier can be unboundedly large. However, if the monetary-fiscal expansion is for a fixed T periods, the multiplier is much smaller. Our explanation rests on a Jensen's inequality type argument: the deterministic multiplier is convex in duration, and the stochastic multiplier is a weighted average of the deterministic multipliers. The quantitative difference in the two multipliers also arises in a model with capital, and in the baseline nonlinear model. However, the differences between the two is less pronounced in the nonlinear models.

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December, 2012 Federal Reserve Bank of Cleveland, working paper no. 12-34 ; Timothy S Fuerst; Matthias Paustian; Working Papers
Abstract: Recent monetary policy experience suggests a simple diagnostic for models of monetary non-neutrality. Suppose the central bank pegs the nominal interest rate below steady state for a reasonably short period of time. Familiar intuition suggests that this should be modestly inflationary, and a reasonable model should deliver such a prediction. We pursue this simple diagnostic in several variants of the familiar Dynamic New Keynesian (DNK) model. Some variants of the model produce counterintuitive inflation reversals where the effect of the interest rate peg can switch from highly inflationary to highly deflationary for only modest changes in the length of the interest rate peg. Curiously, this unusual behavior does not arise in a sticky information model of the Phillips curve.

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2012-17 ; Timothy S Fuerst; Economic Commentary
Abstract: There are many possible formulations of the Taylor rule. We consider two that use different measures of economic activity to which the Fed could react, the output gap and the growth rate of GDP, and investigate which captures past movements of the fed funds rate more closely. Looking at these rules through the lens of a partial-adjustment Taylor rule, we conclude that the gap rule does a better job of explaining the actual funds rate data, and provides a better rule-of-thumb for understanding historical monetary policy.

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June, 2012 Federal Reserve Bank of Cleveland, working paper no. 12-15. ; Timothy S Fuerst; Matthias Paustian; Working Papers
Abstract: This paper revisits the size of the fiscal multiplier. The experiment is a fiscal expansion under the assumption of a pegged nominal rate of interest. We demonstrate that a quantitatively important issue is the articulation of the exit from the policy experiment. If the monetary-fiscal expansion is stochastic with a mean duration of T periods, the fiscal multiplier can be unboundedly large. However, if the monetary-fiscal expansion is for a fixed T periods, the multiplier is much smaller.

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June, 2012 Federal Reserve Bank of Cleveland, working paper no. 12-16R ; Timothy S Fuerst; Alberto Ortiz; Matthias Paustian; Working Papers
Abstract: This paper addresses the positive implications of indexing risky debt to observable aggregate conditions. These issues are pursued within the context of the celebrated financial accelerator model of Bernanke, Gertler and Gilchrist (1999). The principal conclusions include: (1) the estimated level of indexation is significant, (2) the business cycle properties of the model are significantly affected by this degree of indexation, (3) the importance of investment shocks in the business cycle depends upon the estimated level of indexation, and (4) although the data prefers the financial model with indexation over the frictionless model, they have remarkably similar business cycle properties for non-financial exogenous shocks.

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January, 2012 Federal Reserve Bank of Cleveland, working paper no. 12-04 ; Timothy S Fuerst; Matthias Paustian; Working Papers
Abstract: This paper derives the privately optimal lending contract in the celebrated financial accelerator model of Bernanke, Gertler and Gilchrist (1999). The privately optimal contract includes indexation to the aggregate return on capital and household consumption. Although privately optimal, this contract is not welfare maximizing as it exacerbates fluctuations in real activity. The household's desire to hedge business cycle risk, leads, via the financial contract, to greater business cycle risk. The welfare cost of the privately optimal contract (when compared to the planner outcome) is quite large. A countercyclical tax on lender profits comes close to achieving the planner outcome.

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January, 2012 Federal Reserve Bank of Cleveland, Working Paper no. 12-02 ; Timothy S Fuerst; Matthias Paustian; Working Papers
Abstract: Recent monetary policy experience suggests a simple test of models of monetary non-neutrality. Suppose the central bank pegs the nominal interest rate below steady state for a reasonably short period of time. Familiar intuition suggests that this should be inflationary. But a monetary model should be rejected if a reasonably short nominal rate peg results in an unreasonably large inflation response. We pursue this simple test in three variants of the familiar dynamic new Keynesian (DNK) model. All of these models fail this test. Further some variants of the model produce inflation reversals where an interest rate peg leads to sharp deflations.

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August, 2011 Federal Reserve Bank of Cleveland, working paper no. 11-17 ; Timothy S Fuerst; Matthias Paustian; Working Papers
Abstract: This paper addresses the positive and normative implications of indexing risky debt to observable aggregate conditions. These issues are pursued within the context of the celebrated financial accelerator model of Bernanke, Gertler and Gilchrist (1999). The principal conclusions are that the optimal degree of indexation is significant, and that the business cycle properties of the model are altered under this level of indexation.

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2010-4 ; Timothy S Fuerst; Economic Commentary
Abstract: Banks have long been required to hold reserves equal to a percentage of their net transactions accounts (checkable deposits, for example), but until recently, they earned no interest on those reserves. The Fed now pays interest on required and excess reserve balances, having been granted the authority by Congress and putting the policy into place ahead of schedule so that it could be used to help address the financial crisis. The policy will be particularly useful when it is time to start tightening policy and unwind the Fed’s balance sheet.

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October 2009 ; Andrea Pescatori; Economic Commentary
Abstract: This Economic Commentary explains the concerns that are associated with the combination of deflation, low economic activity, and zero nominal interest rates and describes how monetary policy might be conducted in such a situation. We argue that avoiding expectations of deflation is key and that the monetary authority needs to demonstrate an unequivocal commitment to preventing deflation. We also argue that price-level targeting might be a good device for communicating such a commitment.

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February 2008 Federal Reserve Bank of Cleveland, Economic Commentary ; Timothy S Fuerst; Economic Commentary
Abstract: Observations that the Phillips curve may be deviating from historical norms are important to policymakers because deviations would imply that more or less output has to be sacrificed to achieve a permanent reduction in long-term inflation. But we argue that recent economic shocks and a shift in the Fed’s response to inflation may be leading economists to misestimate the curve.

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January 2008 Federal Reserve Bank of Cleveland, Economic Commentary ; Timothy S Fuerst; Economic Commentary
Abstract: Monetary policymakers look to the Phillips curve—an expression of the relationship between inflation and the degree to which the economy is operating relative to its potential—for information about the cost of actions undertaken to lower inflation. Recent estimations of the curve suggest it is deviating from historical norms. We argue that changes in trend inflation and Fed operating procedures are not being taken into account in these estimations and that when they are, changes in the curve are minor and need not concern policymakers.

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December, 2007 Federal Reserve Bank of Cleveland, Working Paper no. 0721 ; Timothy S Fuerst; Working Papers
Abstract: There is growing evidence that the empirical Phillips curve within the US has changed significantly since the early 1980?s. In particular, inflation persistence has declined sharply. The paper demonstrates that this decline is consistent with a standard Dynamic New Keynesian (DNK) model in which: (i) the variability of technology shocks has declined, and (ii) the central bank more aggressively responds to inflation.

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March 2007 Federal Reserve Bank of Cleveland, Policy Discussion Paper, no. 17 ; Timothy S Fuerst; Policy Discussion Papers
Abstract: We trace the consequences of an energy shock on the economy under two different monetary policy rules: a standard Taylor rule where the Fed responds to inflation and the output gap; and a Taylor rule with inertia where the Fed moves slowly to the rate predicted by the standard rule. We show that with both sticky wages and sticky prices, the outcome of an inertial Taylor rule is superior to that of the standard rule, in the sense that inflation is lower and output is higher following an adverse energy shock. However, if prices alone are sticky, things are less clear and the standard rule delivers substantially less inflation than the inertial rule in the short run.

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December, 2006 Federal Reserve Bank of Cleveland, Working Paper no. 0621 ; Timothy S Fuerst; Working Papers
Abstract: We document increased central bank independence within the set of industrialized nations. This increased independence can account for nearly two thirds of the improved inflation performance of these nations over the last two decades.

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December 2006 Federal Reserve Bank of Cleveland, Economic Commentary ; Timothy S Fuerst; Economic Commentary
Abstract: Nobel laureate Milton Friedman, who died on November 16, 2006, made monumental contributions to economics and changed the course of modern central banking. Many of his proposals for the conduct of monetary policy were controversial at the time he made them but are now widely accepted. This Commentary reviews some of them.

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November, 2006 Federal Reserve Bank of Cleveland, Working Paper no. 0614 ; Timothy S Fuerst; Working Papers
Abstract: In an interesting paper Barsky, House, and Kimball (2005) demonstrate that in a standard sticky price model a monetary contraction will lead to a decline in nondurable goods production but an increase in durable goods production, so that aggregate output is little changed. This lack of co-movement between nondurables and durables is wildly at odds with the data and occurs because, by assumption, durable goods prices are relatively more flexible than nondurable goods prices. We investigate possible solutions to this puzzle: nominal wage stickiness and credit constraints. We demonstrate that by adding adjustment costs as in Topel-Rosen, the sticky wage model solves the co-movement puzzle and delivers reasonable volatilities.

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September 1, 2006 Federal Reserve Bank of Cleveland, Economic Commentary ; Timothy S Fuerst; Economic Commentary
Abstract: Low inflation over long periods is the sign of an effective central bank. The authors suggest that a large fraction of the worldwide decline in inflation since the early 1980s results from an international movement toward more independent central banks.

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November 2005 Federal Reserve Bank of Cleveland, Economic Commentary ; Timothy S Fuerst; Economic Commentary
Abstract: There has been a remarkable increase in the FOMC’s communication over the last decade. Perhaps the most dramatic change was the inclusion of language indicating the possible direction of future policy. One example is the now famous "considerable-period" language that was inserted in August 2003. This forward-looking language was remarkable in that it seemingly signaled the Committee’s intention to keep rates low for an extended period. This Commentary analyzes the reasons behind the "considerableperiod-of-time" language, and it argues that such language was important to stem further declines in inflation since the funds rate was already close to its lower bound of zero.

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September, 2005 Federal Reserve Bank of Cleveland, Working Paper no. 0510 ; Timothy S Fuerst; Working Papers
Abstract: Recessions are associated with both rising oil prices and increases in the federal funds rate. Are recessions caused by the spikes in oil prices or by the sharp tightening of monetary policy? This paper discusses the difficulties in disentangling these two effects.

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July 2005 Federal Reserve Bank of Cleveland, Economic Commentary ; Timothy S Fuerst; Economic Commentary
Abstract: Recessions are associated with both rising oil prices and increases in the federal funds rate. Are recessions caused by the spikes in oil prices or by the sharp tightening of monetary policy? The authors discuss how to disentangle these two effects.

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April 2005 Federal Reserve Bank of Cleveland, Policy Discussion Paper, no. 10 ; Timothy S Fuerst; Policy Discussion Papers
Abstract: Every U.S. recession since 1971 has been preceded by two things: an oil price shock and an increase in the federal funds rate. Bernanke, Gertler, and Watson (1997,2004) investigated how much oil price shocks have contributed to output growth by asking the following counterfactual question: Empirically how much would we expect oil price increases to have contributed to output growth if the Fed had kept the rate constant instead of letting it increase? They concluded that, at most, half of the observed output declines can be attributed to oil price increases. Most were actually caused by funds rate increases. A problem with their empirical analysis, however, is that it implicitly assumes that the Fed can continually "fool" the public. That is, the funds rate is led constant even though the public actually expects the Fed to follow its historical policy rule of raising the funds rate in conjunction with oil price increases. We show that if the new policy rule were anticipated oil price increases would have had a much larger impact on output than suggested by Bernanke, Gertler, and Watson's analysis.

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December, 2004 Federal Reserve Bank of Cleveland, Working Paper no. 0413 ; Timothy S Fuerst; Working Papers
Abstract: Should monetary policy respond to asset prices? This paper analyzes this question from the vantage point of equilibrium determinacy.

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November 2004 Federal Reserve Bank of Cleveland, Economic Commentary ; Timothy S Fuerst; Economic Commentary
Abstract: When inflation-indexed Treasury securities were first introduced, economists hoped that they could be used to measure expected inflation easily. The only difference between securities that were indexed to inflation and those that were not was thought to be the extra compensation regular securities had to pay for what the market thought inflation would be. By now it is pretty clear that inflation-indexed Treasuries differ from regular securities in other ways that show up in the yields. This Commentary suggests what these are and discusses a method of correcting for them.

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November, 2004 Federal Reserve Bank of Cleveland Working Paper no. 0410 ; Timothy S Fuerst; Working Papers
Abstract: This paper reviews three recent books. Two books, one by Carl Walsh and one by Michael Woodford, focus on the development of monetary theory. In contrast, the third book is a collection of papers in an NBER volume on inflation targeting. This volume outlines some of the issues that arise when applying the tools described by Walsh and Woodford to the policy goal of targeting inflation rates. A central theme of all three works is the desirability of abstracting from money demand in the analysis of monetary policy. In our review we focus the bulk of our discussion on the absence of money in these models.

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December, 2003 Federal Reserve Bank of Cleveland, Working Paper no. 0321 ; Scott L Baier; Ralph Chami; Thomas F Cosimano; Timothy S Fuerst; Collen Fullenkamp; Working Papers
Abstract: In "Capital Trading, Stock Trading, and the Inflation Tax on Equity," Chami, Cosimano, and Fullenkamp (2001) (hereafter, CCF) analyze a cash-in-advance model in which capital goods are explicitly traded. The authors show that there is more responsiveness of consumption and output to changes in the money supply than exists in the standard neoclassical growth models. This note demonstrates that this arises because CCF implicitly imposed an additional equilibrium restriction on the Cooley and Hansen (1989) model. This restriction can be imposed only if the Cooley and Hansen model is subject to real indeterminacy which occurs whenever the risk aversion coefficient (denoted by lambda in the Chami et al. paper) exceeds 2.

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December, 2003 Federal Reserve Bank of Cleveland, Working Paper no. 0320 ; Timothy S Fuerst; Working Papers
Abstract: This paper analyzes the restrictions necessary to ensure that the interest rate policy rule used by the central bank does not introduce local real indeterminacy into the economy. It conducts the analysis in a Calvo-style sticky price model. A key innovation is to add investment spending to the analysis. In this environment, local real indeterminacy is much more likely. In particular, all forward-looking interest rate rules are subject to real indeterminacy.

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December, 2003 Federal Reserve Bank of Cleveland, Working Paper no. 0319 ; Timothy S Fuerst; Working Papers
Abstract: Benhabib, Schmitt-Grohe, and Uribe (2003) argue that if you relied solely on local analysis you would be led to believe that aggressive, backward-looking interest rate rules are sufficient for determinacy. But from the perspective of global analysis, backward-looking rules do not guarantee uniqueness of equilibrium and indeed may lead to cyclic and even chaotic equilibria. This comment argues that this result is premature. We utilize a discrete time model and make two observations. First, compared to their continuous time model, the cyclic equilibria under a backward-looking rule are much less likely to arise in a discrete time model. Second, pure backward-looking rules are less likely to suffer from these global indeterminacy problems than rules that also include current or future inflation.

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July 2003 Federal Reserve Bank of Cleveland, Economic Commentary ; Timothy S Fuerst; Economic Commentary
Abstract: The Taylor rule, formerly mentioned only in scholarly economics journals, now pops up regularly in news magazines, finance journals, and central bankers’ speeches. Does the Fed follow the rule? Should it? This Commentary explains what the Taylor rule is, discusses why it seems to describe the Federal Reserve’s interest-rate setting, and argues that the rule is most valuable as a guideline rather than a prescription.

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August 15, 2002 Federal Reserve Bank of Cleveland, Economic Commentary ; Timothy S Fuerst; Vasso P Ioannidou; Economic Commentary
Abstract: When stock market values fall, we know that investors expect lower economic growth in the future. But can stock market declines actually affect future growth? There is some evidence that they can-through the credit channel.

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February 15, 2002 Federal Reserve Bank of Cleveland, Economic Commentary ; Timothy S Fuerst; Economic Commentary
Abstract: Monetary policy rules help central banks exercise the discipline necessary to achieve their long-term goals. The type of rule many banks are turning to these days is inflation targeting, which has several advantages. But because banks base their actions on forecasts of future inflation, following the rule can lead to inflation-rate instability in some cases. A price-level target offers the same benefits as an inflation target but, because actions are based on past inflation, it avoids this vulnerability.

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January, 2002 Federal Reserve Bank of Cleveland, Working Paper no. 0205 ; Timothy S Fuerst; Working Papers
Abstract: Should monetary policy respond to asset prices? This paper analyzes a general equilibrium model with imperfect capital markets and rigid nominal wages. Within the context of this model, there is a natural role for the benevolent central bank to dampen the real effects of asset price movements.

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January, 2002 Federal Reserve Bank of Cleveland, Working Paper no. 0202 ; Timothy S Fuerst; Fabio Ghironi; Working Papers
Abstract: What inflation rate should the central bank target? We address determinacy issues related to this question in a two-sector model in which prices can differ in equilibrium. We assume that the degree of nominal price stickiness can vary across the sectors and that labor is immobile. The contribution of this paper is to demonstrate that a modified Taylor principle holds in this environment. If the central bank elects to target sector one, and if it responds with a coefficient greater than unity to price movements in this sector, then this policy rule will ensure determinacy across all sectors. The results of this paper have at least two implications. First, the equilibrium-determinacy criterion does not imply a preference to any particular measure of inflation. Second, since the Taylor principle applies at the sectoral level, there is no need for a Taylor principle at the aggregate level.

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December 2001 Federal Reserve Bank of Cleveland, Economic Review, vol. 37, no. 4, pp. 51-59 ; Timothy S Fuerst; Economic Review
Abstract: The Modigliani-Miller theorem is fundamental to the theory of corporate finance. One of the theorem's immediate implications is that there is no reason for the monetary authority to respond to asset prices. This article posits a world in which the Modigliani-Miller theorem does not hold. The authors assume that the amount of an entrepreneur's external financing is limited by the amount of collateral she holds. They examine the implications for the monetary authority in such an environment.

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March 2001 Federal Reserve Bank of Cleveland, Economic Review, vol. 37, no. 1, pp. 9-19 ; Timothy S Fuerst; Economic Review
Abstract: What rule should a central bank interested in inflation stability follow? Because monetary policy tends to work with lags, it is tempting to use inflation forecasts to generate policy advice. This article, however, suggests that the use of forecasts to drive policy is potentially destabilizing. The problem with forecast-based policy is that the economy becomes vulnerable to what economists term "sunspot" fluctuations. These welfare-reducing fluctuations can be avoided by using a policy that puts greater weight on past, realized inflation rates rather than forecasted, future rates.

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February 15, 2001 Federal Reserve Bank of Cleveland, Economic Commentary ; Timothy S Fuerst; Economic Commentary
Abstract: If a central bank adopted a zero inflation target, it would, in practice, occasionally deviate up and down from that rate, and the economy would experience episodes of mild inflation and deflation. Is deflation—a decrease in the level of prices—a cause for concern? Deflation can cause output to decline, but to what extent? This Economic Commentary explores how much of a problem deflation might be for modern economies by estimating the effect of massive price declines on output during the Great Depression. The authors find that while deflation can cause output to decline, mild episodes of deflation are unlikely to be a problem.

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January, 2001 Federal Reserve Bank of Cleveland, Working Paper no. 0117 ; Timothy S Fuerst; Working Papers
Abstract: It is well known that sunspot equilibria may arise under an interest-rate operating procedure in which the central bank varies the nominal rate with movements in future inflation (a forward-looking Taylor rule). This paper demonstrates that these sunspot equilibria may be learnable in the sense of E-stability.

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January, 2001 Federal Reserve Bank of Cleveland, Working Paper no. 0116 ; Timothy S Fuerst; Working Papers
Abstract: The authors analyze the restrictions necessary to ensure that the interest-rate policy rule used by the central bank does not introduce real indeterminacy into the economy. They conduct this analysis in a flexible price economy and a sticky price model that satisfies the natural rate hypothesis. A necessary and sufficient condition for real determinacy in the sticky price model is that there must be nominal and real determinacy in the corresponding flexible price model. This arises if and only if the Taylor rule responds aggressively to lagged inflation rates.

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January, 2001 Federal Reserve Bank of Cleveland, Working Paper no. 0115 ; Timothy S Fuerst; Working Papers
Abstract: This working paper examines a theoretical model in which an entrepreneur's net worth affects his ability to finance current activity. Net worth, in turn, is determined by asset prices, which can be affected by monetary policy. In this environment, the central bank plays a welfare-improving role by responding to asset price and technology shocks.

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March 2000 Federal Reserve Bank of Cleveland, Economic Review, vol. 36, no. 1, pp. 22-32 ; Timothy S Fuerst; Economic Review
Abstract: A traditional function of the central bank is to control the price level. The fiscal theory of the price level challenges this assumption, arguing instead that the fiscal authority's budgetary policy is the primary determinant of the price level. The authors provide a critical review of the fiscal theory and its implications for monetary policy.

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January, 2000 Federal Reserve Bank of Cleveland, Working Paper no. 0011 ; Timothy S Fuerst; Working Papers
Abstract: This paper integrates money into a real model of agency costs. Money is introduced by imposing a cash-in-advance constraint on a subset of transactions. The underlying real model is a standard real-business-cycle model modified to include endogenous agency costs. The paper's chief contribution is to demonstrate how the monetary transmission mechanism is altered by these endogenous agency costs. In particular, do agency costs amplify and/or propagate monetary shocks?

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January, 2000 Federal Reserve Bank of Cleveland, Working Paper no. 0010 ; Timothy S Fuerst; Working Papers
Abstract: The authors show that in a plausibly calibrated monetary model with explicit production, exogenous money growth rules ensure real determinacy and thus avoid sunspot fluctuations. Although it is theoretically possible to construct examples in which real indeterminacy does arise, these examples rely on implausible money-demand elasticities or ignore the effect of production on the model's dynamics.

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January, 2000 Federal Reserve Bank of Cleveland, Working Paper no. 0009 ; Timothy S Fuerst; Working Papers
Abstract: This paper analyzes the restrictions necessary to ensure that the policy rule used by the central bank does not introduce real indeterminacy into the economy. It conducts this analysis in a flexible price economy and a sticky price model. A robust conclusion is that to ensure determinacy the monetary authority should follow a backward-looking rule where the nominal interest rate responds aggressively to past inflation rates.

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November 1999 Federal Reserve Bank of Cleveland, Economic Commentary ; Timothy S Fuerst; Economic Commentary
Abstract: To head off inflation before it gets started, central banks must use forecasts. But using forecasts to determine monetary policy actions introduces the possibility that inflation will increase just because the public expects it to. This Economic Commentary explains how random events—sunspots—can affect economic systems and lead to volatility in prices. The authors suggest that sunspots can be avoided with an approach that responds predominantly to past, rather than predicted, inflation.

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April 15, 1999 Federal Reserve Bank of Cleveland, Economic Commentary ; Timothy S Fuerst; Economic Commentary
Abstract: Is inflation (in the often-quoted words of Milton Friedman) “always and everywhere a monetary phenomenon”? Some say no, arguing that inflation is controlled not only by the central bank but also by the fiscal authority. This Commentary authors explore their argument, known as the fiscal theory of the price level.

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January, 1999 Federal Reserve Bank of Cleveland, Working Paper no. 9911 ; Timothy S Fuerst; Working Papers
Abstract: This paper uses a model of a small, open economy to address two monetary policy issues: 1) What restrictions on the policy rule ensure that the central bank does not introduce real indeterminacy into the economy? and 2) What is the optimal long-run rate of inflation? The model's simplicity makes analyzing determinacy issues remarkably transparent. As for long-run inflation rates, a small, open economy takes the foreign nominal interest rate as a given. To the extent that this rate distorts domestic behavior, positive domestic nominal rates (in contrast to Friedman's celebrated optimum quantity of money) play a role.

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January, 1999 Federal Reserve Bank of Cleveland, Working Paper no. 9910R ; Timothy S Fuerst; Working Papers
Abstract: An increasingly common approach to the theoretical analysis of monetary policy ensures that a proposed policy does not introduce real indeterminacy-and thus sunspot fluctuations-into the model economy. Policy is typically conducted in terms of directives for the nominal interest rate. This paper uses a discrete-time, money-in-the-utility function model to demonstrate how seemingly minor modifications in the trading environment result in dramatic differences in the policy restrictions needed to ensure real determinacy. These differences arise because of the differing pricing equations for the nominal interest rate.

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June 1998 Federal Reserve Bank of Cleveland, Economic Review, vol. 34, no. 2, pp. 2-12 ; Christy D Rollow; Economic Review
Abstract: An examination of why black Americans' earnings continue to lag whites' and why the problem is especially acute in the southern states. Better understanding of the factors driving regional pay differentials can help explain some of the disparities at the national level and is also applicable to a wide variety of other public policy issues.

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May 15, 1998 Federal Reserve Bank of Cleveland, Economic Commentary ; Christy D Rollow; Economic Commentary
Abstract: Many analysts believe that the United States should subsidize training to increase its workers' skills because employers don't provide enough. This Commentary asks whether the present level of training is truly insufficient, or whether firms' incentives may already be in synch with the social costs and benefits of training.

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January, 1998 Federal Reserve Bank of Cleveland, Working Paper no. 9819 ; Timothy S Fuerst; Working Papers
Abstract: An examination of a standard sticky-price monetary model whose conditions are perturbed relative to the canonical real-business-cycle model by two varying distortions: marginal cost and the nominal rate of interest. The paper explores the implications of two monetary policies that are frequently advocated: (1) an inflation target and (2) an interest rate target.

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January, 1998 Federal Reserve Bank of Cleveland, Working Paper no. 9818R ; Timothy S Fuerst; Working Papers
Abstract: This paper demonstrates that in a standard monetary model with a cash-in-advance constraint on consumption there exists real indeterminacy whenever the nominal interest rate moves too closely with the real rate. A particular example of such a policy is an inflation rate target. This is not a knife-edge result. The conclusion is robust to a wide range of calibrations and to a monetary environment that allows for endogenous velocity.

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July 1996 Federal Reserve Bank of Cleveland, Economic Commentary ; Timothy S Fuerst; Economic Commentary

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June 1996 Federal Reserve Bank of Cleveland, Economic Review, vol. 32, no. 2, pp. 2-14 ; Timothy S Fuerst; Economic Review

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January, 1996 Federal Reserve Bank of Cleveland, Working Paper no. 9621 ; David E Altig; Working Papers
Abstract: In this paper, we perform computational counterfactual experiments to examine the quantitative impact of marginal tax rates on the distribution of income. Our methodology builds on previous simulation models developed by Auerbach and Kotlikoff and Fullerton and Rogers, and uses an algorithm that allows us to examine marginal tax rate structures in their literal form. We find that distortions associated with particular marginal tax rate structures have sizable effects on income inequality in a reasonably quantified life-cycle setting: In our baseline experiments, the change in steady-state income inequality under 1989 U.S. income tax rates vis-à-vis 1984 rates is about half as large as the change actually seen in the data over those two years, when measured in terms of a monetary metric derived from Gini coefficients.

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January, 1996 Federal Reserve Bank of Cleveland, Working Paper no. 9602 ; Timothy S Fuerst; Working Papers
Abstract: An analysis of the quantitative effects of agency costs in a real business cycle model, showing that these costs can explain why output growth displays positive autocorrelation at short horizons.

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1995 Federal Reserve Bank of Cleveland, Economic Review. Q IV, 1995 - p. 2-9 ; David E Altig; Economic Review
Abstract: A summary of the fifth in a series of symposiums sponsored by the Federal Reserve Bank of Cleveland. The September 1994 meeting was dedicated to monetary policy issues and included examinations of the macroeconomic effects of price rigidity and sluggish savings decisions by households, the interaction of inflation and financial intermediation, and the "deep structural" estimation of parameters in models with money and financial intermediation.

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October 1995 Federal Reserve Bank of Cleveland, Economic Review, vol 31, no. 4 ; Stanley D Longhofer; Economic Review
Abstract: Violations of the absolute priority rule in both private workouts and Chapter 11 reorganizations have been enigmatic for financial economists. Why do such violations exist? Do they promote or curtail economic efficiency? This paper demonstrates that the answers depend on the specific contracting problem that a firm and its creditors face. As a result, an optimal bankruptcy institution should allow contract participants to decide ex ante whether such violations will occur.

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August 15, 1995 Federal Reserve Bank of Cleveland, Economic Commentary ; Economic Commentary

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January, 1995 Federal Reserve Bank of Cleveland, Working Paper no. 9508 ; David E Altig; Working Papers
Abstract: An Auerbach-Kotlikoff (AK) overlapping-generations model is used to examine how changes in marginal income-tax rate structures affect the distribution of income, drawing on actual changes to the U.S tax code. This approach builds on AK by allowing for many different cohort types, and hence for a nontrivial endogenous distribution of income.

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January, 1995 Federal Reserve Bank of Cleveland, Working Paper no. 9504 ; Timothy S Fuerst; Working Papers
Abstract: This paper considers the welfare consequences of two particularly simple rules for monetary policy: an interest rate peg and a money growth peg. The model economy consists of a real side that is the standard real business cycle model, and a monetary side that amounts to imposing cash-in-advance constraints on certain market transactions. The paper also considers the effect of assuming a rigidity in the typical household's cash savings choice. The competitive equilibrium of the economy is not Pareto efficient, partly because of two intertemporal distortions: a distortion on the capital accumulation decision, and a distortion on portfolio choice that arises from the assumed rigidity. The principal result of the paper is that the interest rate rule (but not the money growth rule) entirely eliminates these two intertemporal distortions and is thus the benevolent central banker' s policy choice.

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January, 1995 Federal Reserve Bank of Cleveland, Working Paper, no. 9503 ; David E Altig; Kevin J Lansing; Working Papers
Abstract: An argument that variations of extant general-equilibrium monetary models can generate real-time economic forecasts comparable in accuracy to those contained in the Federal Reserve Board's "Greenbook" briefing documents.

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December 1994 Federal Reserve Bank of Cleveland, Economic Review, vol. 30, no. 4, pp. 30-42 ; David E Altig; Economic Review

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September 15, 1994 Federal Reserve Bank of Cleveland, Economic Commentary ; Economic Commentary

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June 1, 1994 Federal Reserve Bank of Cleveland, Economic Commentary ; Economic Commentary

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July 1, 1993 Federal Reserve Bank of Cleveland, Economic Commentary ; Economic Commentary

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June 1993 Federal Reserve Bank of Cleveland, Economic Review, vol. 29, no. 2, pp. 2-11 ; David E Altig; Economic Review

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January, 1993 Federal Reserve Bank of Cleveland, Working Paper no. 9313 ; Katherine A Samolyk; Working Papers
Abstract: Models of bank loan sales often appeal to regulatory constraints to motivate this off-balance-sheet activity. Here, we present a market-based model of bank asset sales in which information asymmetries create the incentive for unregulated banks to originate and sell loans to other banks, rather than fund them with deposit liabilities. Banks have a comparative advantage in locating and screening projects within their locality. However, because of private information, banks can fund projects in their portfolio only to the extent that their capital can adequately buffer potential losses on these investments. A loan sales market allows a banker having adequate capital to acquire profitable projects originated by a banker whose own capital is insufficient to support the additional risk.

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January 1993 Federal Reserve Bank of Cleveland, Economic Review, vol. 29, no. 1 ; Katherine A Samolyk; Economic Review
Abstract: Many view the proliferation of securitization as a response to competitive or regulatory pressures. But to what extent would assetbacked lending occur in a less regulated environment? This paper addresses the extent to which models of credit intermediation have been able to formalize some of the market-based forces driving this phenomenon. The authors examine four papers that model some of the dimensions of asset-backed markets. An underlying theme is that under certain conditions, the very information costs that make financial markets important as conduits of credit can also create nonregulatory incentives for asset-backed lending as an efficient funding mode.

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May 1, 1992 Federal Reserve Bank of Cleveland, Economic Commentary ; Katherine A Samolyk; Economic Commentary

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January, 1992 Federal Reserve Bank of Cleveland, Working Paper no. 9212 ; David E Altig; Working Papers
Abstract: Using the well-known dynamic fiscal policy framework pioneered by Auerbach and Kotlikoff, we examine the efficiency and welfare implications of shifting from a linear marginal tax rate structure to a discrete rate structure characterized by two regions of flat tax rates of 15 and 28 percent. For a wide range of parameter values, we find that there is no sequence of lump-sum transfers that the (model) government can feasibly implement to make the shift from the linear to the discrete structure Pareto-improving. We conclude that the worldwide trend toward replacing rate structures having many small steps between tax rates with structures characterized by just a few large jumps is not easily accounted for by efficiency arguments. In the process of our analysis, we introduce a simple algorithm for solving dynamic fiscal policy models that include "kinks" in individual budget surfaces due to discrete tax codes. In addition to providing a relatively straightforward way of extending Auerbach-Kotlikoff-type models to this class of problems, our approach has the side benefit of facilitating the interpretation of our results.

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October 1991 Federal Reserve Bank of Cleveland, Economic Review, vol. 27, no. 4 ; William T Gavin; Economic Review
Abstract: In November 1990, the Federal Reserve Bank of Cleveland sponsored a Conference on Price Stability. The participating economists were asked to explain how recent developments in macroeconomic research have changed the way we think about optimal inflation policy. In particular, the discussions center on the implications for the optimal inflation trend (the Friedman-Phelps debate) and for the degree of variability of inflation around the trend. The six papers presented at the conference, though limited in practical policy dimensions, provide a detailed evaluation of the issues surrounding the Friedman-Phelps debate.

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September 1991 Federal Reserve Bank of Cleveland, Economic Review, vol. 27, no. 3, pp. 18-29 ; Jagadeesh Gokhale; Economic Review

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February 15, 1991 Federal Reserve Bank of Cleveland, Economic Commentary ; Jagadeesh Gokhale; Sharon E Parrott; Economic Commentary

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January, 1991 Federal Reserve Bank of Cleveland, Working Paper no. 9113 ; William T Gavin; Working Papers
Abstract: A comparison showing that the transition costs of indexing inflation (a major obstacle to monetary policy reform) are approximately equal to the minor shoe-leather benefits of having price stability.

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January, 1991 Federal Reserve Bank of Cleveland, Working Paper no. 9108 ; David E Altig; Working Papers
Abstract: Indexation of the personal tax code for price-level changes represents one of the most significant elements of U.S. tax legislation in the 1980s. However, because the indexation provisions do not adjust personal tax-rate schedules contemporaneously, bracket indexation remains incomplete. This paper argues that, even ignoring the remaining problems associated with capital-income measurement, depreciation provisions, and so on, the potential distortionary costs of inflation/tax-system interactions remain high.

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January, 1991 Federal Reserve Bank of Cleveland, Working Paper no. 9105 ; Edward N Gamber; Working Papers
Abstract: An analysis of a one-period, two-sector model in which firms must pay a fixed cost of hiring. The authors show that this type of model results in more employment variability and less-procyclical wages than do models without fixed hiring costs.

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January, 1991 Federal Reserve Bank of Cleveland, Working Paper no. 9102 ; David E Altig; Working Papers
Abstract: An examination, using the overlapping-generations approach, of how the interactions between inflation and the nominal taxation of capital income affect the cyclical behavior of the U.S. economy.

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January, 1990 Federal Reserve Bank of Cleveland, Working Paper no. 9006 ; David E Altig; Working Papers
Abstract: A reexamination of the potential costs of anticipated inflation in view of the inflation indexing system established during the 1980s.

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January 1, 1990 Federal Reserve Bank of Cleveland, Economic Commentary ; Edward N Gamber; Economic Commentary

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July 1989 Federal Reserve Bank of Cleveland, Economic Review, vol. 25, no. 3 ; Edward N Gamber; Economic Review
Abstract: An examination of the commonly accepted positive correlation between money and real output, including a review of several models of business cycles and an explanation of how money can be neutral and yet still appear to affect real output.

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January, 1989 Federal Reserve Bank of Cleveland, Working Paper no. 8902 ; Working Papers
Abstract: An explanation of involuntary unemployment and procyclical quits based on models of implicit contracts and on-the-job search.

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January 1989 Federal Reserve Bank of Cleveland, Economic Review, vol. 25, no. 1 ; Economic Review
Abstract: An argument that adverse selection in the labor market can explain why frequent job-changers have lower average wages and flatter age-earnings profiles than workers who change jobs infrequently. Adverse selection also provides a basis for examining the welfare implications of low-productivity workers in the labor market.

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Bank Runs, Deposit Insurance, and Bank Regulation, Part II

 

February 15, 1988 Federal Reserve Bank of Cleveland, Economic Commentary ; Economic Commentary

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February 15, 1988 Federal Reserve Bank of Cleveland, Economic Commentary ; Economic Commentary
Abstract: An examination of contagious bank runs and a discussion of how private clearinghouses have protected against widespread bank failures, with the determination that federal deposit insurance may not be necessary to protect against runs; conclusion of February 1 issue.

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February 1, 1988 Federal Reserve Bank of Cleveland, Economic Commentary ; Economic Commentary
Abstract: An analysis of the costs and benefits of providing federal deposit insurance as a means of preventing widespread bank failures, and the role of bank regulators in assuring bank solvency; article concludes with February 15 issue.

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Bank Runs, Deposit Insurance, and Bank Regulation, Part I

 

February 1, 1988 Federal Reserve Bank of Cleveland, Economic Commentary ; Economic Commentary

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January, 1988 Federal Reserve Bank of Cleveland, Working Paper no. 8814 ; Edward N Gamber; Working Papers
Abstract: A presentation of a sectoral-shifts model with money that explains the short-run Phillips curve and predicts a long-run positive relationship between inflation and unemployment.

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January, 1987 Federal Reserve Bank of Cleveland, Working Paper no. 8717 ; Working Papers
Abstract: An explanation of the observed relationships between voluntary job turnover and wages over a worker's lifetime, using a model featuring adverse selection.

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January, 1987 Federal Reserve Bank of Cleveland, Working Paper no. 8712 ; Working Papers
Abstract: This paper extends the implicit contracts framework to allow for on-the-job search. It is shown that involuntary unemployment can arise in such a framework without placing any a priori restrictions on either wages or severance payments. The model also implies that firms will practice a two-tier system of adjusting their labor force. In the first stage, workers who receive outside job offers leave the firm. The second stage consists of firms hiring additional workers during good states of nature, and laying off workers during bad states of nature. Furthermore, during "bad enough" states of nature, firms will offer a severance payment or bonus for those who want to voluntarily leave, and then lay off workers without offering a large enough severance payment to compensate them for being unemployed.

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January, 1987 Federal Reserve Bank of Cleveland, Working Paper no. 8710 ; Working Papers
Abstract: A demonstration that optimal monetary policy can be either procyclical or countercyclical in a model where wages are "sticky" because of a nominal contracting constraint.

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Title Date Publication Author(s) Type
Does It Matter (for Equilibrium Determinacy) What Price Index the Central Bank Targets?

 

forthcoming Journal of Economic Theory ; Timothy S Fuerst; Fabio Ghironi; Journal Article

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Thinking about Monetary Policy without Money

 

forthcoming International Finance ; Timothy S Fuerst; Journal Article

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Investment and Interest Rate Policy: A Discrete Time Analysis

 

forthcoming Journal of Economic Theory ; Timothy S Fuerst; Journal Article

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Money Growth Rules and Self-Fulfilling Hyperinflations: A Note

 

forthcoming Journal of Money Credit and Banking ; Timothy S Fuerst; Journal Article

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Optimal Fiscal and Monetary Policy under Imperfect Competition: A Comment

 

June 2004 Journal of Macroeconomics, V. 26, pp. 219-222, June 2004 ; Timothy S Fuerst; Journal Article

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Learning and the Central Bank

 

March 2004 Journal of Monetary Economics V. 51, pp. 327-338, March 2004 ; Timothy S Fuerst; Journal Article

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Capital Trading, Stock Trading and the Inflation-tax on Equity: A Note

 

October 2003 Review of Economic Dynamics, V.6 (4), pp. 767-789, October 2003 ; Scott L Baier; Ralph Chami; Thomas F Cosimano; Timothy S Fuerst; Collen Fullenkamp; Journal Article

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Backward-Looking Interest-Rate Rules, Interest-Rate Smoothing, and Macroeconomic Instability: A Comment

 

2003 Journal of Money,Credit, and Banking 35(6) Part 2, 2003, pp. 1413-1424 ; Timothy S Fuerst; Journal Article

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Money Growth Rules and Price Level Determinacy

 

April 2003 Review of Economic Dynamics, Volume 6 (2), pp. 263-275, April 2003 ; Timothy S Fuerst; Journal Article

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Taylor Rules in a Model that Satisfies the Natural Rate Hypothesis

 

May 2002 American Economic Review, V. 92 (2), pp. 79-84, May 2002 ; Timothy S Fuerst; Journal Article

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Real Indeterminacy in Monetary Models with Nominal Interest Rate Distortions

 

October 1, 2001 Review of Economic Dynamics, vol. 4, no. 4, October 2001, pp. 767-89 ; Timothy S Fuerst; Journal Article

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Monetary Shocks, Agency Costs, and Business Cycles

 

May 1, 2001 Carnegie-Rochester Conference Series on Public Policy, vol. 54, no. 0, June 2001, pp. 1-27 ; Timothy S Fuerst; Journal Article

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Timing and Real Indeterminacy in Monetary Models

 

April 1, 2001 Journal of Monetary Economics, vol. 47, no. 2, April 2001, pp. 285-98 ; Timothy S Fuerst; Journal Article

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Marginal Tax Rates and Income Inequality in a Life-Cycle Model

 

December 1, 1999 American Economic Review, vol. 89, no. 5, December 1999, pp. 1197-1215 ; David E Altig; Journal Article

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Agency Costs and Business Cycles

 

November 1, 1998 Economic Theory, vol. 12, no.3, November 1998, pp. 583-597 ; Timothy S Fuerst; Journal Article

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A Note of the Role of Countercyclical Monetary Policy

 

August 1, 1998 Journal of Political Economy, vol. 106, no. 4, August 1998, pp. 860-866 ; Timothy S Fuerst; Journal Article

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Agency Costs, Net Worth, and Business Cycle Fluctuations: A Computable General Equilibrium Analysis

 

December 1, 1997 American Economic Review, vol. 87, no. 5, December 1997, pp. 893-910 ; Timothy S Fuerst; Journal Article

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A Troubled Lineup: The Rationing of Transplantable Organs

 

October 1, 1997 The Cato Journal, vol. 17, no. 2, Fall 1997, pp. 163-177 ; Christy D Rollow; Journal Article

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The Rationing of Transplantable Organs: A Troubled Lineup

 

October 1, 1997 The Cato Journal, vol. 17, no. 2, Fall 1997, pp. 163-77 ; Christy D Rollow; Journal Article

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Computable General Equilibrium Models and Monetary Policy Advice

 

November 1995 Journal of Money Credit and Banking, November 1995, V. 27 (4) pt. 2, pp. 1472-1505 ; David E Altig; Kevin J Lansing; Journal Article

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Interest Rate Rules vs. Money Growth Rules: A Welfare Comparison in a Cash-in-Advance Economy

 

November 1, 1995 Journal of Monetary Economics, vol. 36, no. 2, November 1995, pp. 247-67 ; Timothy S Fuerst; Journal Article

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Introduction to Conference Volume: Liquidity, Monetary Policy, and Financial Intermediation

 

November 1, 1995 Journal of Money, Credit, and Banking, vol. 27, no. 4, part 2, November 1995, pp. 1199-1208 ; David E Altig; Journal Article

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Loan Sales as a Response to Market-Based Capital Constraints

 

May 1, 1995 Journal of Banking and Finance, vol. 19, no. 3-4, June 1995, pp. 627-46 ; Katherine A Samolyk; Journal Article

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Zero Inflation: Transition Costs and Shoe Leather Benefits

 

1993 Contemporary Policy Issues. vol. 11, no. 1, January 1993, pp. 9-17 ; William T Gavin; Journal Article

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Inflation, Personal Taxes, and Real Output: A Dynamic Analysis

 

August 1, 1991 Journal of Money, Credit, and Banking, vol. 27, no. 4, part 2, August, 1991, pp. 547-571 ; David E Altig; Journal Article

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