Essays of the transmission dynamics of a pure currency economy with irreversible shocks

This dissertation consists of three essays on the transition dynamics of a pure currency economy. The common theme is the effects of irreversible random shocks, where agents know the hazard rates of such events, but not the time of their actual occurrence. In the following three essays, we examine in turn, (1) the equilibrium price level and asset distribution in the presence of government risks, (2) the nature of fixed exchange rate regime when some economies in the world are subject to government risks, and (3) inflation episodes when seignorage is used to finance wars of uncertain duration.; The main contribution of the first essay is to define and analyze the concept of a conditional steady state in an economy subject to government risks. The price level and the asset distribution remain the same each period as long as government risks have not occurred. Such an equilibrium may prevail when the hazard rate itself depends upon the state of the system.; The contribution of the second essay addresses the issue which apparently separates the results of the micro-based models of Kareken and Wallace, as well as Lucas, on one side and the opinion of Dornbusch on the other. In those models with micro foundations, the exchange rate stays constant under the flexible exchange rate regime. Therefore, the result is no different from fixed exchange rate regime pegged at that equilibrium rate. By Dornbusch, the choice of exchange rate regimes should matter. We find that sometimes the fixed exchange rate system may not be viable at all.; The contribution of the third essay is to explain the inflation episodes in terms of the rational expectations framework. This is a theme made famous by Sargent, where the end of an inflation episode causes the demand for money to shift suddenly upward. Our formulation regards the end of inflation as neither totally unforeseen nor fully expected as a known function of time. Instead, inflation ends due to the occurrence of some random events, for instance, the end of a war financed by an inflation tax.