Chari 9632054 This project consists of research on the transmission mechanism linking monetary policy to outcome. The first part quantifies the extent to which fluctuations in output and inflation in postwar US data are due to the fact that monetary policy is conducted under discretion. This issue is addressed in a class of dynamic, quantitative, general equilibrium models with purposeful policy makers. These models are sued to determine how much the conduct of monetary policy can be improved by alternative feasible institutional arrangements. The preliminary models described here convey interesting insights about the characteristics of economies in which monetary policy is conducted without commitment. One such insights is that discretion can exacerbate volatility and increase instability in the economy. Another is that delegating monetary policy authority to a central banker who dislikes inflation more than the benevolent planner may also increase instability. These insights suggest that episodes like the great inflation of the 1980s were an inevitable consequence of discretion. The models imply that various institutional reforms limiting the flexibility of policymakers would lead to more desirable outcomes. The second part of this project consists of two types of quantitative models of the monetary transmission mechanism. One consists of models of wage contracting which rest on secure microeconomic foundations,. The other studies staggered price-setting. Both types are designed to address the short-coming of existing models that monetary disturbances do not lead to large, persistent fluctuations in output. The project also studies the sources of the vast inequality of incomes among countries.
