Three Essays in Macroeconomics and Monetary Economics

Abstract

The thesis includes three essays on macroeconomics and monetary economics. The first essay is my work in macroeconomics, particularly Chinese economy. The rest two essays are my work in monetary economics, and also the focus of my doctoral thesis. After the Global Financial Crisis, the Quantitative Easing (or unconventional monetary policy) in the U.S., Japan and other advanced economies have inspired theoretical interest in the questions of how monetary policy can affect the interest rates of money and other assets, and further affect the real economy. In the second and third essays, I build micro-founded models with money and government bonds to address those questions. The first essay studies the real exchange rate appreciation caused by nontraded factor misallocation in China. The departure of a factor in excess supply in the non-traded sector leads to a real exchange rate appreciation, in a setup that combines the canonical Lewis Model with a Balassa-Samuelson traded/nontraded dichotomy. China is an ideal case for non-traded factor appreciation, since it has not completed its structural transformation. My model identifies nontraded goods with rural output produced in the West of China, and traded goods with manufactures produced on the Eastern Seaboard using overseas capital. According to the model, China’s real exchange rate should appreciate as the hukou system, which acts to trap labor in the rural West, is dismantled. The second essay develops a micro-founded model of money and bonds to address effects of monetary policy on output and unemployment. The baseline model considers both money and short-term government bonds serving as media of exchange. We analyze the effects of conventional monetary policy when Central Bank conducts open market operations (OMOs) by adjusting short-term bonds holdings. Conventional monetary policy is effective only when the shortterm interest rate is positive. Then we introduce long-term government bonds to address the effects of unconventional monetary policy, particularly when the