Essays on monetary economics
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In the first chapter, I examine an incomplete markets economy in a politico-economic general equilibrium setting in which the median voter chooses the inflation rate. I use an environment where individuals face an uninsurable idiosyncratic labor productivity shock, and money is the only asset. Being an effective tax on savings, inflation acts as a redistribution mechanism transferring resources from the rich to the poor. I show that the median voter chooses a positive inflation rate as the politico-economic equilibrium outcome. In the second chapter, I analyze how forming a monetary union affects consumption and earnings inequalities through monetary policy changes implied by adopting a common currency. I use a two country open-economy, overlapping-generations model with heterogenous individuals to investigate these effects. In the model, inflation tax is the only redistributive tool and consumption and earnings inequalities are decreasing functions of inflation. When forming a monetary union, countries face a trade-off between the undesirable distributional effects of losing their monetary autonomy and benefits from the elimination of trade frictions. Findings suggest that when countries choose to do so, the country with higher initial inflation will definitely experience a fall in its inflation, hence an increase in its inequalities. In the country with lower initial inflation, however, inflation and inequalities might go in either direction depending on the degree of heterogeneity and the trade dependency between the countries. As the inflationary effect of uniting its monetary policy with a high inflation country can dominate the reducing effect of vanished trade frictions on inflation, this country might have an increase in its inflation, and a decrease in its inequalities. Finally, in the third chapter, I compare the indirect measure of inflation expectations derived by Ireland (1996b) to the direct measures obtained from expectations surveys in two case studies: the US and Turkey. Our results show that the inflation bounds calculated for US data are more volatile than survey results, and are too narrow to contain them due to low standard errors in consumption growth series stemming from high persistence. For the Turkish case, on the other hand, out of three different surveys on inflation expectations in Turkey compared with the bounds computed using Turkish data, expectations obtained by the Consumer Tendency Survey fall within these bounds throughout the whole sample period. Moreover we show that, as Fisher's theory suggests, real interest rates are extremely volatile in Turkey and movements in nominal interest rates cannot be directly used as an indicator of changes in inflation expectations.