Essays on monetary policy, wage rigidities and dollarization

This dissertation studies the role played by wage rigidities and dollarization in explaining the propagation of monetary policy shocks to output and inflation. In the first essay, I introduce real wage rigidities into a sticky-price New Keynesian framework. The model seeks to capture (i) the small variation of real wages over the cycle, (ii) the sluggishness of real marginal costs necessary to explain the observed persistence of inflation, and (iii) the low cross correlation of real wages and output. An efficiency wages setup with different risk sharing arrangements is incorporated to provide this labor market friction. Simulations of the model match the empirical response of real wages, inflation and output to monetary policy shocks. The model increases the persistence of inflation and output, but not enough to match the data.; The second essay solves the puzzle described in (iii) by incorporating new monetary punishment rules into the model developed in the first essay. According to the new rules, detected shirkers receive the level of wages (nominal or real) earned in the previous period. When the punishment implies nominal wage backwardness, the model is able to capture the low cross correlation of output and real wages. The backwardness in wage setting enhances the persistence of inflation compared to the model developed in the first essay.; The third essay, which is joint work with Vicente Tuesta, analyzes the difficulties of central banks to stabilize inflation and output after monetary policy shocks in an economy where both domestic and foreign currencies coexist. We develop a small open economy with imperfect competition and price rigidities where foreign currency is demanded as a composite of domestic currency. We compare the dynamic responses to a monetary policy shock under different interest rate feedback rules and find that the higher the degree of dollarization the more ineffective the central bank is to stabilize output and inflation. Finally, we derive the optimal monetary policy, which incorporates inflation targeting. A welfare exercise suggests that welfare losses increase with a higher the degree of dollarization.