Three Essays in Macroeconomics

This dissertation contains three essays on macroeconomics. In chapter one, I develop a business cycle model with price rigidities and differential nominal wage rigidities among workers of different skill levels. The model captures observed heterogeneity in the labor market. In particular, high-skilled individuals have more volatile real wages, but less volatile hours relative to low-skilled individuals over the business cycle. I use the model to evaluate the welfare effects of monetary policy. I find that the optimal monetary policy is contingent on the welfare weight attached to each skill group, but the redistributive consequences from following any one policy are quantitatively small.In chapter two, which is coauthored with Michael Pries and Eric Sims, we explore the relationship between volatility and welfare. Even though households prefer smooth streams of consumption and leisure, welfare can be increasing in the volatility of an exogenous driving force if factor supply is sufficiently elastic. We provide some analytical results for a model without capital, and do some quantitative exercises in a model with capital and a variety of shocks. Welfare is greater in high shock volatility regimes under plausible parameter values. Augmenting the model with features that increase the elasticity of factor supply extends the range of parameters over which higher volatility results in greater welfare.In the final chapter, I analyze the consequences of including home production in a New Keynesian model with staggered price setting. Home production amplifies responses to technology and monetary policy shocks. Compared to a model without home production, the model generates close to twice the output response to a monetary policy shock. I consider the implications of several nominal interest rate rules and show that a traditional Taylor rule lacks its usual attractive properties. Alternatively, strict inflation targeting implements the constrained efficient allocation.