Three essays in macro economics

Chikwendu, Maduabuchukwu and Cardi, Olivier and Motta, Giorgio (2025) Three essays in macro economics. PhD thesis, Lancaster University.

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Abstract

In the first chapter, we study the dynamic effect of real shocks in a dual-sector economy featuring asymmetric resource utilization in a medium size DSGE model under alternative pricing assumptions which underscore the ex-ante relationship between exchange rate and import price inflation. In this context, pass through is complete under Producer currency pricing (PCP) and muted under Local currency pricing (LCP). Our results show that in response to an efficient technology innovation the law of one price gap must rise, and sectoral shocks seems to be complementary. Imported inputs in production of traded goods make marginal costs and domestic inflation more sensitive than otherwise would have been in the presence of efficient technology shocks, thereby amplifying the realized real and nominal exchange rate volatility. We also find that while imported inputs in production amplify realized volatility in our theoretical model, a higher share of non-traded goods in consumption mitigates realized volatility, and in the presence of technology shocks, monetary authorities are more accommodatory thereby creating a non-inflationary economic expansion. Next, we study the objectives, conduct and design of optimal monetary policy while accounting for the deviation from the law of one price in a fully optimizing setting, and utilizing the model framework of the previous chapter. Owing to our model characteristics, our results show that the presence of the law of one price gap and the relative price of traded goods in new Keynesian Phillips curve (NKPC) create a meaningful trade off, forcing central banks to accommodate some fluctuations in output gap and inflation in the face of efficient shocks. Our findings highlight the optimal policy response of the benevolent social planner, who adjust rates in response to the natural rate of interest, the deviation of CPI inflation from its target, and the deviations from the law of one price under discretion and commitment. Our results show that the presence of a framework that guarantees credibility significantly improves the short-run trade-off due to convexity of the flow loss function. Utilizing the welfare losses as an evaluative measure, we find that targeting Consumer prices (CITR) or domestic prices (DITR) are potentially welfare improving, optimal and outperform alternative monetary rules. Finally, we quantify the size, magnitude, frequency and speed of adjustment of pass-through into traded goods prices and quantities. Using a dynamic and partial adjustment model alongside macro timeseries data, we find pass-through to be moderate, substantial and statistically significant, and our empirical results using an appropriately identified structured VAR model point to moderate and incomplete pass-through irrespective of time frequency and we document evidence of declining pass-through over longer periods using both dynamic and structural models.