Handbook of Macroeconomics, 2 FIRST EDITION John B. Taylor Stanford University, Stanford, CA, United States Harald Uhlig University of Chicago, Chicago, IL, United States North-HollandisanimprintofElsevier Radarweg29,POBox211,1000AEAmsterdam,TheNetherlands TheBoulevard,LangfordLane,Kidlington,OxfordOX51GB,UnitedKingdom Copyright©2016ElsevierB.V.Allrightsreserved. Nopartofthispublicationmaybereproducedortransmittedinanyformorbyanymeans,electronicor mechanical,includingphotocopying,recording,oranyinformationstorageandretrievalsystem,without permissioninwritingfromthepublisher.Detailsonhowtoseekpermission,furtherinformationaboutthe Publisher’spermissionspoliciesandourarrangementswithorganizationssuchastheCopyrightClearance CenterandtheCopyrightLicensingAgency,canbefoundatourwebsite:www.elsevier.com/permissions. ThisbookandtheindividualcontributionscontainedinitareprotectedundercopyrightbythePublisher (otherthanasmaybenotedherein). 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BritishLibraryCataloguing-in-PublicationData AcataloguerecordforthisbookisavailablefromtheBritishLibrary LibraryofCongressCataloging-in-PublicationData AcatalogrecordforthisbookisavailablefromtheLibraryofCongress ISBN:978-0-444-59469-3(Vol.2A) ISBN:978-0-444-59466-2(Vol.2B) Setrecord(2Aand2B):978-0-444-59487-7 ForinformationonallNorth-Hollandpublications visitourwebsiteathttps://www.elsevier.com/ Publisher:ZoeKruze AcquisitionEditor:KirstenShankland EditorialProjectManager:JoslynChaiprasert-Paguio ProductionProjectManager:RadhakrishnanLakshmanan CoverDesigner:GregHarris TypesetbySPiGlobal,India INTRODUCTION TO THE SERIES The aim of the Handbooks in Economics series is to produce Handbooks for various branches of economics, each of which is a definitive source, reference, and teaching supplement for use by professional researchers and advanced graduate students. Each Handbookprovidesself-containedsurveysofthecurrentstateofabranchofeconomics intheformofchapterspreparedbyleadingspecialistsonvariousaspectsofthisbranchof economics.Thesesurveyssummarizenotonlyreceivedresultsbutalsonewerdevelop- ments, from recent journal articles and discussion papers. Some original material is also included, but the main goal is to provide comprehensive and accessible surveys. The Handbooks are intended to provide not only useful reference volumes for professional collections but also possible supplementary readings for advanced courses for graduate students in economics. Kenneth J. Arrow and Michael D. Intriligator v EDITOR’S BIOGRAPHY JohnB.TayloristheMaryandRobertRaymondProfessorofEconomicsatStanford Universityandthe GeorgeP. ShultzSenior Fellow in Economicsat Stanford’s Hoover Institution. He is also the director of Stanford’s Introductory Economics Center. His researchfocuses on macroeconomics, monetary economics, and international econom- ics. He coedited Volume 1 of the Handbook of Macroeconomics and recently wrote Getting Off Track, one of the first books on the financial crisis, and First Principles: Five Keys to Restoring America’s Prosperity. He served as senior economist and member of the President’s Council of Economic Advisers. From 2001 to 2005, he served as undersecretary of the US Treasury for international affairs. Taylor was awarded the Hoagland Prize and the Rhodes Prize by Stanford University for excellence in under- graduate teaching. He received the Alexander Hamilton Award and the Treasury Distinguished Service Award for his policy contributions at the US Treasury. Taylor receivedaBAineconomicssummacumlaudefromPrincetonandaPhDineconomics from Stanford. Harald Uhlig, born 1961, is a professor at the Department of Economics of the University of Chicago since 2007 and was chairman of that department from 2009 to 2012.Previously,heheldpositionsatPrinceton,TilburgUniversityandtheHumboldt- Universit€atzuBerlin.Hisresearchinterestsareinquantitativemacroeconomics,financial markets,andBayesianeconometrics.HeservedascoeditorofEconometricafrom2006to 2010andaseditoroftheJournalofPoliticalEconomysince2012(headeditorsince2013). He is a consultant of the Bundesbank, the European Central Bank, and the Federal Reserve Bank of Chicago. He is a fellow of the Econometric Society and a recipient of the Gossen Preis of the Verein fu€r Socialpolitik, awarded annually to an economist in the German language area whose work has gained an international reputation. xix CONTRIBUTORS E.Afanasyeva IMFS, Goethe UniversityFrankfurt, Frankfurt, Germany M. Aguiar Princeton University,Princeton, NJ, United States A. Alesina Harvard University,Cambridge, MA, United States; IGIER,BocconiUniversity, Milan, Italy G.-M. Angeletos MIT;NBER, Cambridge, MA, United States S.Basu Boston College, Chestnut Hill; NBER, Cambridge, MA, United States M.D.Bordo Rutgers University, New Brunswick, NJ;NBER, Cambridge, MA, United States J.Borovicˇka New YorkUniversity, New York, NY; NBER,Cambridge, MA, UnitedStates P.Brinca Nova School of Business and Economics,Lisboa; Centre for Economicsand Finance, Universityof Porto,Porto,Portugal M.K. Brunnermeier Princeton University,Princeton, NJ, United States V.V.Chari UniversityofMinnesota;FederalReserveBankofMinneapolis,Minneapolis,MN,UnitedStates S.Chatterjee Federal Reserve Bank of Philadelphia,Philadelphia,PA, United States H.Cole Universityof Pennsylvania, Philadelphia,PA, United States P.D’Erasmo Federal Reserve Bank of Philadelphia,Philadelphia,PA, United States D.W. Diamond Universityof ChicagoBoothSchool of Business, Chicago, IL;National Bureau of Economic Research,Cambridge, MA, UnitedStates M. Doepke Northwestern University, Evanston, IL, United States E.Farhi Harvard University,Cambridge, MA, United States xxi xxii Contributors J. Ferna´ndez-Villaverde University of Pennsylvania, Philadelphia, PA, United States N. Fuchs-Schu€ndeln GoetheUniversity Frankfurt,Frankfurt, Germany; CEPR, London,UnitedKingdom M. Gertler NYU, New York, NY; Princeton University, Princeton,NJ;Federal ReserveBoardof Governors, Washington,DC, United States M. Golosov Princeton University, Princeton, NJ,United States V. Guerrieri University of Chicago, Chicago,IL; NBER, Cambridge, MA, United States R.E.Hall Hoover Institution, Stanford University,CA; National Bureau of Economic Research, Cambridge, MA, United States J.D.Hamilton University of California, San Diego,La Jolla, CA, UnitedStates G.D.Hansen UCLA, Los Angeles,CA; NBER, Cambridge, MA, United States L.P. Hansen University of Chicago, Chicago,IL; NBER, Cambridge, MA, United States T.A. Hassan CEPR, London, United Kingdom;University of Chicago,Chicago,IL; NBER,Cambridge, MA, United States J. Hassler Institute for International Economic Studies (IIES),Stockholm University, Stockholm; University of Gothenburg, Gothenburg, Sweden; CEPR,London, United Kingdom C.L. House NBER, Cambridge, MA; University of Michigan,Ann Arbor, MI,United States E. Hurst The University of Chicago Booth School of Business,Chicago, IL,United States C.I.Jones Stanford GSB, Stanford, CA; NBER, Cambridge, MA, UnitedStates A.K.Kashyap University of Chicago Booth School of Business, Chicago,IL; National Bureau of Economic Research, Cambridge, MA, United States P.J.Kehoe University of Minnesota; Federal ReserveBankof Minneapolis,Minneapolis,MN, UnitedStates; UniversityCollege London, London,United Kingdom N. Kiyotaki NYU, New York, NY; Princeton University, Princeton,NJ;Federal ReserveBoardof Governors, Washington,DC, United States Contributors xxiii D.Krueger UniversityofPennsylvania,Philadelphia,PA,UnitedStates;CEPR,London,UnitedKingdom; CFS,GoetheUniversityFrankfurt,Frankfurt,Germany;NBER,Cambridge,MA,UnitedStates; Netspar, Tilburg, The Netherlands P.Krusell Institute forInternational Economic Studies(IIES), Stockholm University,Stockholm; Universityof Gothenburg, Gothenburg, Sweden; CEPR, London, United Kingdom; NBER, Cambridge, MA, United States M. Kuete IMFS, Goethe UniversityFrankfurt, Frankfurt, Germany E.M. Leeper Indiana University,IN; NBER, Cambridge, MA, United States C. Leith Universityof Glasgow, Glasgow, United Kingdom C. Lian MIT,Cambridge, MA, United States J.Lind(cid:2)e Sveriges Riksbank; Stockholm School of Economics,Stockholm, Sweden; CEPR, London, United Kingdom E.McGrattan UniversityofMinnesota;FederalReserveBankofMinneapolis,Minneapolis,MN,UnitedStates C.M. Meissner NBER, Cambridge, MA; University of California, Davis, CA, United States E.G. Mendoza PIER, Universityof Pennsylvania, Philadelphia,PA;NBER,Cambridge, MA, United States A. Mian Princeton University,Princeton, NJ; NBER, Cambridge, MA, UnitedStates K. Mitman CEPR, London, United Kingdom; IIES, Stockholm University,Stockholm, Sweden L.E.Ohanian UCLA, Los Angeles; NBER, Cambridge, MA; Hoover Institution, Stanford University, Stanford,CA, UnitedStates A. Passalacqua Harvard University,Cambridge, MA, United States F.Perri CEPR, London, United Kingdom; Federal Reserve Bank of Minneapolis, Minneapolis, MN, United States M. Piazzesi Stanford University, Stanford, CA; NBER, Cambridge, MA, UnitedStates xxiv Contributors E.C. Prescott ArizonaStateUniversity,Tempe,AZ;FederalReserveBankofMinneapolis,Minneapolis,MN, UnitedStates A. Prestipino NYU, New York, NY; Princeton University, Princeton,NJ;Federal ReserveBoardof Governors, Washington,DC, United States V.A.Ramey University of California, San Diego,CA; NBER,Cambridge, MA, United States J.F. Rubio-Ram´ırez Emory University;Federal Reserve Bank of Atlanta, Atlanta, GA,UnitedStates; BBVA Research, Madrid, Madrid,Spain;Fulcrum AssetManagement,London, England, UnitedKingdom Y. Sannikov Princeton University, Princeton, NJ,United States M. Schneider Stanford University, Stanford,CA; NBER, Cambridge, MA, United States F. Schorfheide University of Pennsylvania, Philadelphia, PA, United States F. Smets ECB, Frankfurt,Germany; KU Leuven, Leuven, Belgium;CEPR,London, United Kingdom A.A.Smith, Jr. NBER, Cambridge, MA; Yale University, New Haven, CT, United States Z. Stangebye University of Notre Dame, Notre Dame, IN, United States J.H.Stock Harvard University;The National Bureau of Economic Research, Cambridge, MA, UnitedStates A. Sufi University of Chicago Booth School of Business, Chicago,IL; NBER,Cambridge, MA, UnitedStates J.B.Taylor Stanford University, Stanford,CA, UnitedStates M. Tertilt University of Mannheim, Mannheim, Germany A. Tsyvinski Yale University,New Haven, CT, United States H. Uhlig UniversityofChicago,Chicago,IL;NBER,Cambridge,MA,United States;CEPR, London, UnitedKingdom M.W.Watson The Woodrow Wilson School,Princeton University, Princeton, NJ; TheNational Bureau of Economic Research, Cambridge, MA, United States Contributors xxv I.Werning MIT,Cambridge, MA, United States N.Werquin Toulouse School of Economics,Toulouse, France V.Wieland IMFS, Goethe UniversityFrankfurt, Frankfurt, Germany R.Wouters National Bank of Belgium, Brussels,Belgium; CEPR, London, United Kingdom J.Yoo IMFS, Goethe UniversityFrankfurt, Frankfurt, Germany; Bank of Korea, Seoul, South Korea J.Zhang Federal Reserve Bank of Chicago, Chicago,IL, United States