ABSTRACT. Preston considers a potentially important source of model misspecification in the design of instrument rules: the assumed manner in which expectations are formed. Losses in one state enterprise would be made good by surpluses generated elsewhere in the system, the distribution between surplus and loss taking place across the balance sheet of the monobank system (Kalyuzhnova and Taylor). After an expansionary policy shock, investment increases; in the presence of investment adjustment costs, this implies that the marginal cost of physical capital rises (Christiano et al.).



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