Essays in Monetary Policy

This dissertation examines the complex interplay between monetary policy and economic dynamics across three pivotal essays, each focusing on distinct aspects of monetary policy's influence on labor markets, inflationary expectations, and the production sector's extensive margin. The first chapter analyzes the varied effects of unexpected expansionary monetary policy shocks on high- and low-skilled workers using a New Keynesian DSGE model with asymmetric search and matching frictions. The findings show that unemployment rates for low-skilled workers are more sensitive to these shocks, while high-skilled workers recover faster. This underscores the importance of considering labor skill heterogeneity in devising optimal monetary policies, particularly regarding their effects on consumption, unemployment, and wage dynamics across skill levels. The second chapter assesses the impact of the Federal Reserve's August 2020 policy framework revision on inflation, employing a representative agent New Keynesian model. Simulations of inflationary shocks under different policy rules indicate that a rule combining asymmetric output growth responses and average inflation targeting initially raises inflation more than the standard Taylor rule but stabilizes it more effectively in the medium term. The third chapter explores how monetary policy influences the extensive margin of the production sector, specifically how changes in borrowing costs affect firm entry by productivity levels. Using a New Keynesian model that includes Hopenhayn's entry and exit framework, the study finds that while monetary policy reduces borrowing costs and modifies the equity-bond trade-off to facilitate firm entry, it may also inadvertently attract less efficient firms, thereby potentially neutralizing initial output gains. These chapters collectively contribute to the understanding of the diverse effects of monetary policy on the economy, emphasizing the crucial roles of labor market frictions, inflation targeting, and borrowing costs. This analysis not only advances the existing literature but also provides important insights for policymakers striving to balance economic stability and growth.