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Essays on nominal rigidities, financial constraints and transfers Poon, Doris Sum Yee

Abstract

One principal research in macroeconomics is concerned with the importance of nominal rigidities. This dissertation applies nominal rigidities in closed- and open-economy models to study issues on firms’ pricing decisions, optimal monetary policy in a financially constrained economy, and the choice of exchange rate regime in the presence of transfer problem. Chapter 1 presents empirical evidence for price and wage stickiness, and the development of models with nominal rigidities in macroeconomics and international finance. Chapter 2 incorporates state-dependent pricing in a closed-economy model to explain the asymmetric responses of output and prices to monetary shocks. The model focuses on the effects of strategic complementarity and substitutability in firms’ pricing decisions, as well as the mixed strategies used by an individual firm. The strategic interactions among firms’ pricing decisions lead to asymmetric response of prices and output to monetary shocks. The model implies asymmetries in positive versus negative monetary shocks, and the asymmetric responses are affected by the degree of real rigidity in marginal cost, the magnitude of price-adjusting costs and the market power of an individual firm. Chapter 3 studies the optimal monetary policy of a small open economy with nominal rigidities and exchange-rate sensitive collateral constraints. This model attempts to explain the observed monetary policy behaviour of emerging markets. The model implies pro-cyclical optimal monetary policy when the collateral constraint binds, and an economy with large external shocks that may favour a fixed exchange rate, which are consistent with the observed features of monetary policy used by emerging markets. The last chapter studies the transfer problem using a two-country DSGE model with nominal rigidities. The model compares the effects of a transfer shock under flexible and sticky wages, as well as under fixed and floating exchange rate regimes. The results of this model are consistent with the conventional wisdom in international macroeconomics with nominal rigidities, which suggests that a flexible exchange rate can help reduce internal instability after some negative shocks via exchange rate ad justment. However, the welfare analysis of this model implies the donor country is better off to maintain the gold standard instead of going to a floating exchange rate, even with nominal rigidities.

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