9618303 Eichenbaum This research seeks to understand the extent to which fluctuations in output and inflation in post-war US data are due to the fact that monetary policy is conducted under discretion. This issue is addressed by developing and analyzing a class of dynamic, quantitative, general equilibrium models in which monetary policy is made by policymakers seeking to achieve well-defined objectives. These models are used to determine whether the conduct of monetary policy would have been better under alternative institutional arrangements. This research is motivated by a variety of empirical and policy questions, some of which appear to be puzzling from the perspective of conventional theories. Example of these questions are: (1) Are Great Inflations like we saw in the 1980's an inevitable by-product of discretionary monetary policy? (2) Does discretion lead to excessive fine tuning, that is, too much "leaning against the wind?" (3) What are the welfare gains, if any from imposing limited forms of commitment on the monetary authority? (4) Does delegating authority to a central banker necessarily entail repeated and risky battles to reduce inflation? (5) Do theories based on delegation help account for the evidence of regime switches in postwar US monetary policy? The persuasiveness of any analysis of monetary policy depends crucially on the plausibility of the model. The project constructs, estimates and evaluates the empirical plausibility of alternative business cycle models. The research is aimed at isolating frictions in agents' environments that help account quantitatively for the fact that contractionary shocks to monetary policy lead to small movements in the aggregate price level and real wages, svbustantial declines in output and profits, and a significant rise in short term interest rates. The project evaluates the importance of asset market, good market and labor market frictions in the monetary transmission mechanism. In related work, the projects aims at understanding the cyclical behavior of capacity utilization rates. This work is important because empirically plausible models of the monetary transmission mechanism must embody frictions that damp cyclical movements in the costs of production. The project confronts microeconomic data with business cycle models that allow for nontrivial technological heterogeneity across firms. Finally, the project aims at estimating the magnitude of returns to scale and externalities using microeconomic data. This work is important because a broad class of theories relies on increasing returns to scale and/or externalities as a propagation mechanism or for self fulfilling expectations shocks to be an important source of impulses to the business cycle. ??
