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Solving macroeconomic models is difficult. One challenge is the occasionally binding constraint of the zero lower bound on nominal interest rates. This paper reviews various ways to solve models that include this feature.

This paper considers an economy where central-bank-issued fiat money competes with privately issued e-money. We study a policy-setting game between the central bank and the e-money issuer and find (1) the optimal monetary policy of the central bank depends on the policy of the private issuer and may deviate from the Friedman rule; (2) multiple equilibria may exist; (3) when the economy approaches a cashless state, the central bank’s optimal policy improves the market power of the e-money issuer and can lead to a discrete decrease in welfare and a discrete increase in inflation; and (4) first best cannot be achieved.

We present a simple model to study the risk sensitivity of capital regulation. A banker funds investment with uninsured deposits and costly capital, where capital resolves a moral hazard problem in the banker’s choice of risk.

We develop a model in which a financial intermediary’s investment in risky assets—risk taking—is excessive due to limited liability and deposit insurance and characterize the policy tools that implement efficient risk taking.

In an economy where production takes place in multiple stages and is subject to financial frictions, how firms finance intermediate inputs matters for aggregate outcomes. This paper focuses on trade credit—the lending and borrowing of input goods between firms—and quantifies its aggregate impacts during the Great Recession.

We explore the idea that the financial sector can be a source of non-fundamental risk to the rest of the economy. We also consider whether policy can be used to reduce this risk—either by increasing the supply of publicly backed safe assets or by reducing the demand for safe assets.

We measure systemic risk in the network of financial market infrastructures (FMIs) as the probability that two or more FMIs have a large credit risk exposure to the same FMI participant.

The secular decline in real interest rates has created a challenge for monetary policy, now confronting the zero lower bound more often. An increase in the supply of safe assets reduces downward pressure on the natural interest rate. This allows monetary policy to reach price stability and full employment, but not without cost—permanently lower investment.

We analyze the impact of interest rate policy on financial stability in an environment where banks can experience runs on their short-term liabilities, forcing them to sell assets at fire-sale prices.

Implications for signal extraction from specifying unobserved components (UC) models with correlated or orthogonal innovations have been well investigated. In contrast, the forecasting implications of specifying UC models with different state correlation structures are less well understood.