Essays on Monetary Theory

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2023

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This dissertation consists of two essays about macroeconomic theory of monetary policy. The first essay derives a general algorithm for finding optimal commitment policy when the policymaker's decision stabilizes the economy as well as informing the private sector about fundamental shocks. The paper describes three equivalent formulations of the problem facing the policymaker. The last formulation is recursive, facilitating the finding of the steady state. This paper finds the steady state for a New Keynesian central bank who has both a transitory and a persistent preference shock. Under discretion, the private sector's expected inflation is positive and persistent, limiting the ability of the central bank to achieve its output target. In contrast, under commitment, for both persistent and transient shocks, the central bank achieves negative expected inflation, allowing lower realized inflation and realized output closer to target.

The second essay introduces a new model for intermediate behavior between discretion and commitment. Instead of commitment as the ability bind a future self, this essay reframes it as how much does the current policymaker incorporate the perspective of its past self. In a monetary New Keynesian context, I define Scaled Commitment, where prior Lagrange multipliers are discounted, nesting both discretion and commitment. It also allows different degrees of commitment for the always-binding Phillips curve and occasionally-binding zero lower bound.

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Fratrik, Craig (2023). Essays on Monetary Theory. Dissertation, Duke University. Retrieved from https://hdl.handle.net/10161/27769.

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