Essays on monetary policy

My doctoral dissertation comprises three essays which examine the role of monetary policy in both open and closed economies and under various market imperfections.;The first essay explores the role of monetary policy in a world of segmented financial markets, where the agents who trade stocks encounter financial income risk although the rest do not. In such an economy, I ask the question of how the monetary authority operates when it aims to maximize total welfare. I find that optimal monetary policy has the novel role of sharing the financial market risk traders face, among all agents in the economy. I also find that optimal monetary policy is not necessarily associated either with minimal stock price volatility or with minimal inflation volatility.;The second essay is motivated by the observation that the Great Inflation was an international phenomenon. For the US, the argument criticizing monetary policy has it that the Federal Reserve followed an accommodative policy during the 1970s, although it later changed its policy, fought inflation and managed to lower it to moderate levels. We explore whether the G7 countries implemented similar changes to their inflation policies during the period of the Great Inflation. We develop a generalized Bayesian time-varying parameter model to jointly estimate the G7 monetary authorities' response to inflation. We allow these responses to be correlated across countries, capturing common information, ideas or communication across them. We find that monetary authorities in the G7 countries accommodated inflation until almost the mid 1980s, after which they systematically fought it.;The third paper studies the implications of the optimal monetary policy responses to productivity shocks, in an economy where firms differ in the way they finance their operation. Specifically, this is a model, with two types of firms, the one of which is cash constrained and need to borrow in order to operate. The cash unconstrained firms can operate through credit and pay their labor obligations after they complete their production process. I explore the effects productivity shocks have on this economy and how optimal monetary policy acts in response to them.