No abstract

We study the impact of two-sided nominal shocks in a simple dynamic, general equilibrium (S,s)-pricing macroeconomic model comprised of heterogeneous sectors. The simple model we develop has a number of appealing empirical implications; it captures why some sectors of the economy have systematically more flexible prices, the smooth dynamics of aggregate output following a monetary shock, and a degree of price asynchronization. Incorporating multiple sectors is central to arriving at these three results.JEL Classification: E31, E32, E37, E58.

The usual disclaimer applies.

Should we break up banks and limit bailouts? We study vertical integration of deposit-taking institutions and those investing in risky equity. Integration, by eliminating a credit spread, increases output but entails larger, more frequent bailouts.Bailouts of leveraged institutions boost economic activity but are costly. The optimal structure of intermediaries depends largely on the e¢ ciency of government intervention, the competitiveness of the …nancial sector and shocks hitting the economy. Separated institutions are preferred when pro…t margins are small, …nancial shocks systemic and volatile, and bailouts costly. For a baseline calibration, universal banks are typically preferred.

This paper establishes that one can generally obtain a purely quadratic approximation to the unconditional expectation of social welfare when the steady-state is distorted. A specific example is provided employing a canonical New Keynesian model. Unlike in the non-distorted steady state case, the approximate loss function is not defined simply over terms in inflation and output. Furthermore, optimal steady state inflation and the nominal interest rate are positive. JEL Classification: E20; E32; F32; F41.