The focus of the following three essays rests on the Kydland-Prescott (1977) and
Barro-Gordon (1983) model of time inconsistent discretionary monetary policy. The first
essay derives a model in which the costs and benefits to inflation are tied to the underlying
features of the economy. The benefit to inflation arises due to monopolistic competition
among firms and the cost is due to a staggered timing structure for nominal money. The
benefit of this approach is that it can be shown that factors that increase the monetary
authority's incentive to inflate may also increase the costs to inflation, and therefore do
not necessarily result in a worsened inflation bias. In particular, the model shows that
discretionary inflation in the economy is nonmonotonically related to the distortion. The
model also indicates that changes in the real interest rate affect the monetary authority's
incentives and hence the discretionary rate of inflation. An increase in the labor share
raises the discretionary rate. Lastly, lack of commitment, costs to inflation, and the
presence of a distortion are crucial for discretionary inflation to be biased above the
Friedman (1969) rule. The second essay builds on the first, extending the model to
an open economy environment. The extended model indicates several channels through
which openness affects the monetary authority's incentives. Most significantly, the model
cannot replicate the Romer (1993) and Lane (1995) result that openness reduces the
discretionary rate of inflation. Again, the model relates the underlying features of the
economy on the discretionary rate, and an economy's foreign asset position. Strategic
incentives are also important for determining whether an open economy's rate of inflation is less than that of a comparable closed economy. The last essay analyzes empirically the
relationship between the overall degree of competition among firms, as measured by the
markup, and the average rate of inflation for the OECD group of countries. In line with
the time-consistency argument, results indicate a positive relationship between markups
and inflation. This finding is robust to the inclusion of several explanatory variables,
such as terms of trade effects, and central bank independence. The evidence is weak,
however, in the presence of per capita GDP. / Arts, Faculty of / Vancouver School of Economics / Graduate
| Identifer | oai:union.ndltd.org:UBC/oai:circle.library.ubc.ca:2429/8626 |
| Date | 05 1900 |
| Creators | Neiss, Katharine Stefanie |
| Source Sets | University of British Columbia |
| Language | English |
| Detected Language | English |
| Type | Text, Thesis/Dissertation |
| Format | 4137344 bytes, application/pdf |
| Rights | For non-commercial purposes only, such as research, private study and education. Additional conditions apply, see Terms of Use https://open.library.ubc.ca/terms_of_use. |
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