Essays in Macroeconomics and International Finance

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Hernaiz Diez de Medina, Daniel
Aruoba, Boragan
Shea, Jhon
This document is a collection of essays in two issues of interest in macroeconomics and international finance. Chapter 2 introduces price promotions in a monetary DSGE model where consumers differ in their price sensitivity and look for promotions, and where firms choose their regular and promotional prices as well as the frequency of promotions. In this environment, regular and promotional prices coexist, firm-level prices show rigidity in the form of inertial reference values from which weekly prices temporarily deviate, and promotions provide a new channel of price adjustment in the face of shocks. As a result, the economy displays near neutrality with respect to monetary shocks, with an impact response of output equal to one third of the one obtained in a model with no promotions. This result contrasts sharply with those of similar studies which, using alternative rationales for price promotions, find that price promotions do not fundamentally alter the real effects of monetary shocks. Chapter 3 studies the currency substitution phenomenon and develops a two-currency model that introduces "dollarization capital" as a means to capture the economy's accumulated experience in using the foreign currency. The model is able to generate a low-inflation-high-substitution equilibrium consistent the data, and explains 1/6 of the gap between the observed currency substitution ratios and those generated by a model with no dollarization capital dynamics. The model, however, does not generate asymmetries in the relationship between inflation and currency substitution before and after high inflation episodes. Therefore, Chapter 4 presents a simple framework that creates non-linearities between inflation and currency substitution. The model has two consumers who can differ in their distance from money exchange points provided by the financial sector, who decides whether or not to pay a fixed cost necessary to install these exchange points. In this environment, a sequence of episodes of high and moderate inflation may push the financial sector into expanding the number of available money exchange points, therefore permanently reducing the consumers' cost of using the foreign currency and decreasing the inflation threshold at which households are willing to substitute foreign for domestic currency.