ESSAYS ON MACROECONOMIC VOLATILITY AND MONETARY ECONOMICS
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My dissertation consists of two independent essays on macroeconomic volatility and monetary economics respectively. The first essay explores the implications of imperfect information on macroeconomic volatility. It offers a micro-founded theory of time variation in the volatility of aggregate economic activity based on rational inattention. I consider a dynamic general equilibrium model in which firms are limited in their ability to process information and allocate their limited attention across aggregate and idiosyncratic states. According to the model, a decrease in the volatility of aggregate shocks causes the firms optimally to allocate less attention to the aggregate environment. As a result, the firms' responses, and therefore the aggregate response, becomes less sensitive to aggregate shocks, amplifying the effect of the initial change in aggregate shock volatility. As an application, I use the model to explain the Great Moderation, the well-documented significant decline in aggregate volatility in the U.S. between 1984 and 2006. The exercise is disciplined by measurements of the changes in aggregate and idiosyncratic volatilities. The model can account for 90% of the observed decline in aggregate output volatility. 67% of the decline is due to the direct effect of the drop in the volatility of aggregate technology shocks and the other 23% captures the volatility amplification effect due to the optimal attention reallocation from aggregate to idiosyncratic shocks. A version of the model without rational inattention can capture the former effect but not the latter. The second essay examines the redistributive effects of monetary policy using a dynamic general equilibrium model with heterogenous agents. I study the long-run effects of inflation on output, consumption and welfare, as well as the distribution of wealth in the economy. Unlike in representative agent models, heterogeneity can potentially allow for beneficial effects of inflation. Increases in the growth rate of money supply can reduce wealth dispersion, increasing output and welfare.