Using a standard dynamic general equilibrium model, we show that the interaction of staggered nominal contracts with hyperbolic discounting leads to in ‡ation having signi…cant long-run e¤ects on real variables.JEL Classi…cation: E20, E40, E50

The paper sets out a theory of hedonic adaptation and resilience. By distinguishing between stocks and flows of psychological resources, it suggests a new way to think about the dynamics of human well-being or "happiness". Central to the analysis is a concept we refer to as hedonic capital. We build on the idea that the evolutionary function of happiness is as a motivating device. Our model successfully replicates the patterns routinely found in well-being data -particularly the empirical regularity of an approximately stable level of well-being and the adaptive tendency to return towards that level. The formal model provides a number of testable empirical predictions.

We construct a dynamic general equilibrium model in which household debt is sticky in nominal terms and debtor households are credit constrained. Interest payments on debt contracts may be at floating rates or fixed for the duration of the contract. A key result is that a simple static Taylor Rule can result in a prolonged period in which real interest rates are cut rather than raised in response to an inflationary shock. We show how the proportion of fixed rate contracts affects the monetary transmission mechanism and its implications for the distributional effects of an inflationary shock.

We provide a microfounded account of imperfect information in the stochastic growth model which dramatically changes the properties of the model. We describe heterogenous households that acquire information about aggregates through their participation in markets. If markets are incomplete, household information will be imperfect. We solve the model taking account of the in…nite regress of expectations that this lack of information implies. We derive analytical and numerical results to show that imperfect information can signi…cantly change the properties of the model: under virtually all calibrations the impact response of consumption to a positive aggregate technology shock is negative.JEL classi…cation: D52; D84; E32.

Using a standard dynamic general equilibrium model, we show that the interaction of staggered nominal contracts with hyperbolic discounting leads to in ‡ation having signi…cant long-run e¤ects on real variables.JEL Classi…cation: E20, E40, E50