Thesis title: Essays in Monetary Policy, Expectations Formation, and Heterogeneous Agent Models
The thesis consists of three articles focusing on monetary policy. They all utilize the New Keynesian (NK) framework and deviate from the standard NK approach in the way of modelling heterogeneity, expectations formation, and uncertainty. I show how these deviations may affect the monetary policy behavior and its prescriptions.
In Chapter 1, coauthored with Jan Zemlicka, we analyze the optimal window length in the average inflation targeting rule within a Behavioral Heterogeneous Agent NK model. The central bank faces an occasionally binding effective lower bound (ELB) or persistent supply shocks, and can also use quantitative easing. We show that the optimal averaging period is infinity for a moderate myopia. Finite yet long-lasting windows dominate for stronger cognitive discounting; i.e., the makeup property is shown to be qualitatively resistant to deviation from rational expectations. We point out that the optimal window depends on the speed of return to the target path when myopia plays a bigger role.
In Chapter 2, I disentangle assumptions behind the consumption response to changes in inflation expectations in the New Keynesian framework. The standard result of a positive reaction hinges upon implausibly large general equilibrium effects and weak negative real expected income channel even if changes in inflation expectations are not accompanied by similar nominal wage growth expectations. I decompose the total consumption reaction into the intertemporal substitution effect and the income effect in the absence of propagation of inflation expectations into expectations of nominal salaries and show that the consumption response always stays positive in the Representative Agent NK (RANK) model due to the profits income channel. However, the total effect can be negative in a stylized Heterogeneous Agent NK (HANK) model if the profits income channel is dampened and the lack of propagation is strong.
In Chapter 3, I discuss how the aggregate uncertainty substantially affects the behavior of rational expectations equilibrium (REE) macroeconomic models. Utilizing the standard New Keynesian model with occasionally binding constraint, I show that the role of the uncertainty is extensively sidelined even with a slight deviation from the REE. It almost disappears when using empirically relevant expectations formation. When macroeconomists use empirically disciplined expectations formation, solution techniques that abstract from the uncertainty may not lose much compared to true rational expectation solutions that take the uncertainty into account.