Book Description

This dissertation focuses on the consequences of labor market policies, environmental cap-and-trade policies, and monetary policy. These three types of economic policies are admittedly very distinct, but they are tied together by the type of analysis I employ to study these policies. For each, I develop a specific general equilibrium model aimed at highlighting the policy in question and use cutting-edge computational methods to numerically solve the model across an array of potential policies. In the first chapter, The Distributional Effects of Labor Adjustment Cost Policies, I introduce a general equilibrium model with heterogeneous plants and labor adjustment costs to explore both the aggregate and distributional effects of labor adjustment costs. I use the model to analyze the effects of policies that would repeal all or half of state-mandated firing costs in European countries. The model predicts that a full repeal of state-mandated firing costs in the average European country would increase aggregate labor productivity by 0.7%-6.2% while increasing the rate of job turnover by 65%-420%. In the second chapter, Emissions Allowance Allocation in Cap-and-Trade Policies, I present a version of "Impacts of Alternative Emissions Allowance Allocation Methods Under a Federal Cap-and-Trade Program", co-written with Lawrence H. Goulder and Michael Dworsky, published in the Journal of Environmental Economics and Management, Volume 60, Issue 3, November 2010, pages 161-181. To examine the implications of alternative allowance allocation designs for industry profits and GDP under a federal cap-and-trade program to reduce greenhouse gas emissions, we employ a general equilibrium model of the U.S. economy with a unique treatment of capital dynamics that permits close attention to profit impacts. Effects on profits depend critically on the relative reliance on auctioning or free allocation of allowances. Freely allocating fewer than 15\% of the emissions allowances generally suffices to prevent profit losses in the most vulnerable U.S. industries. Freely allocating all of the allowances substantially overcompensates these industries. When emissions allowances are auctioned and the proceeds are employed to finance cuts in income tax rates, GDP costs are about 33 percent lower than when all the allowances are freely allocated. The results are robust to policies differing in stringency, the availability of offsets, and the opportunities for intertemporal trading of allowances. In the final chapter, I present \textit{Interbank Lending and Monetary Policy in a DSGE Model}, which was written with Josephine Smith. We build a DSGE model with heterogeneous banks and interbank lending to explore how monetary policy should respond to shocks in the interbank lending market. To do this, we build upon the Bernanke, Gertler, and Gilchrist \citeyear{bgg1999} model of the financial accelerator by introducing a monopolistically competitive banking sector. The model is the first of its kind to include a monopolistically competitive banking sector, heterogeneous banks, and an interbank lending market. We find that the heterogeneous monopolistically competitive banking sector mitigates macroeconomic variance in the model relative to a perfectly competitive banking sector. Multiple banks that imperfectly compete with each other can help absorb shocks better than a single representative bank and mitigate the financial accelerator effect. We also find that financial supply side shocks, as measured by shocks to the productivity of bank loan production, have a much greater effect on the real economy than the demand-side financial shocks. In addition, we find that shocks to the ex-ante most productive banks have a larger effect on the real economy than shocks to the ex-ante least productive banks because the banks with high productivity (ex-ante) have a larger share of the financial market. Analyzing the effect of shocks to interbank lending rates (relative to the central bank policy rate), we find large macroeconomic effects of such policies. Finally, we find that a monetary policy interest rate rule that incorporates the financial sector can actually dampen the effects of traditional non-financial shocks such as productivity, government spending, and monetary policy shocks and leads to a significant decrease in business-cycle volatility.