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Essays on Monetary Economics and Applied Macroeconomics
By:Donghai Zhang
Published on 2018 by

This thesis consists three chapters on topics in monetary economics and applied macroeconomics. In the first chapter, I consider a framework where the central bank has private information about future economic conditions. Agents update their beliefs according to Bayes' theorem. Policy actions play a signaling role, and may therefore have an impact on both short and long-term interest rates. I discuss the implications of information frictions for the design of optimal simple rule. In the second chapter, I explore the role of market power for the optimal choice of infla-tion index for a central bank to stabilize In a framework with cross-sector heterogeneities in both nominal rigidity and market power. The optimal weight attached to inflation in a sector is increasing in this sector's: i)price stickiness (stickiness channel) and ii) degree of market competition (competition channel). Moreover, if firms in a more competitive sector adjust their price more frequently as predicted by costly price adjustment models, the competition channel offsets the stickiness channel. In the third chapter, I show that for short horizon exchange rate predictability, the simple random walk model outperforms professional forecasts. A new puzzle arises: why do professional forecasters not adopt the simple random walk model to provide a more accurate estimate? I provide an explanation based on ambiguity averse forecasters.

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