This note uses a nonlinear structural vector autoregression model to empirically investigate the effectiveness of official foreign exchange (FX) interventions in an economy when interest rates are constrained to the zero level, based on Japanese data in the 1990s. The model allows us to estimate the effects of FX interventions operating through different channels. We find that FX interventions are still capable of influencing the foreign exchange rate in a zero-interest-rate environment, even though their effects are greatly reduced by the zero lower bound on interest rates. Our results suggest that although it might be feasible to use the exchange rate as an alternative monetary policy instrument at zero interest rates as proposed by McCallum (Inflation Targeting and the Liquidity Trap, NBER working paper 8225, 2000), the exchange rate–based Taylor rule may not be very effective in achieving the ultimate policy goals.

We present a model of a dynamic and complex economy in which the creation and the destruction of money result from interactions between multiple and heterogeneous agents. In the baseline scenario, we observe the stabilization of the income distribution between wages and profits. We then alter the model by increasing the flexibility of wages. This change leads to the formation of a deflationary spiral. Aggregate activity decreases and unemployment increases. The macroeconomic stability of the model is affected and eventually a systemic crisis arises. Finally, we show that the introduction of a minimum wage would have made it possible to boost the aggregate demand and to avoid this crisis.

This paper provides conditions for bounding tail probabilities in stochastic economic models in terms of their transition laws and shock distributions. Particular attention is given to conditions under which the tails of stationary equilibria have exponential decay. By way of illustration, the technique is applied to a threshold autoregression model of exchange rates.

This note analytically examines the interrelations between macroeconomic (in)stability and investment adjustment costs in a one-sector endogenously growing small–open economy representative-agent model. We show that under costly capital accumulation, the economy exhibits indeterminacy and sunspots if and only if the equilibrium wage–hours locus slopes upward and is steeper than the household's labor supply curve. By contrast, the economy without adjustment costs for capital investment always displays saddlepath stability and equilibrium uniqueness, regardless of the degree of increasing returns inaggregate production.

Many economic analyses are based on the property that the value of a commodity vector responds continuously to a change in economic environment. As is well known, however, many infinite-dimensional models, such as an infinite–time horizon stochastic growth model, lack this property. In the present paper, we investigate a stochastic growth model in which dual vectors lie in an L∞ space. This result ensures that the value of a stock vector is jointly continuous with respect to the stock vector and its support price vector. The result is based on the differentiation method in Banach spaces that Yano [Journal of Mathematical Economics 18 (1989), 169–185] develops for stochastic growth models.

In this paper we use a simple model with a single Cobb–Douglas firm and a consumer with a CRRA utility function to show the difference between the equity premia in the production-based Brock model and the consumption-based Lucas model. With this simple example we show that the equity premium in the production-based model exceeds that of the consumption-based model with probability 1.

This paper uses the old Keynesian representative agent model developed by Roger E. A. Farmer [Expectations, Employment and Prices. New York: Oxford University Press (2010)] to answer two questions: (1) Do increased government purchases crowd out private consumption? (2) Do increased government purchases reduce unemployment? Farmer compared permanent tax-financed expenditure paths and showed that the answer to (1) was yes and the answer to (2) was no. We generalize his result to temporary bond-financed paths of government purchases that are similar to the actual path that occurred during WWII. We find that a temporary increase in government purchases does crowd out private consumption expenditure as in Farmer. However, in contrast to Farmer's experiment, we find that a temporary increase in government purchases can also reduce unemployment.