An investigation into the positive and normative aspects of monetary policy

This dissertation consists of three chapters, each of which focuses on a different aspect of monetary policy. In the first chapter, I develop a methodology that uses private forecasts of output, interest rates and prices to assess the effects of money on output and prices. I contrast the predictions of my model with the current practice that derives forecasts from a linear econometric model. The advantage of my methodology is that it is more likely to be robust to changes in policy regimes and to the exclusion of important information from the forecasting equations. I find that the two approaches yield broadly similar results concerning the effect of money on output, but that the effect of tight money on prices is positive when using the market-based shocks constructed from private forecasts.; In the second chapter, I present a theoretical analysis of the response of optimal monetary policy to productivity shocks. I develop a model in which money is used as the medium of exchange. I characterize the policy of a monetary authority that maximizes the welfare of its citizens, and analyze the implications of this policy for unemployment insurance. I find that monetary authorities tend to increase money supply when productivity increases. This implies an insurance policy that is procyclical, the opposite of the standard counter-cyclical view of unemployment insurance.; In the third chapter, I analyze the costs and benefits of monetary unions. I extend the model considered in chapter two to multiple-countries, and contrast the policies of national monetary authorities that maximize national welfare with those of a monetary union that maximizes the welfare of the union as a whole. I find that the national monetary authorities tend to create too much money. Smaller or more open nations have a greater incentive to create money. I find that if the countries are not too dissimilar then the creation of a union increases welfare.