Dissertation Defense: Dongjae Lee

Candidate: Dongjae Lee

Major: Economics

Advisors: Behzad T. Diba, Ph.D. and Dan Cao, Ph.D.

Title: Essays on Macroeconomic Asymmetry and Monetary Policy

This dissertation examines macroeconomic asymmetries and their implications for monetary policy. In the first chapter, we study a non-linear New Keynesian model with an asymmetry in price-adjustment costs (more severe downward rigidity in prices), and a number of its interesting implications. The model implies that the “standard” New Keynesian equilibrium – in which expectations about a stabilizing monetary policy in the future set the current nominal anchor during effective lower bound (ELB) episodes – exists even if the expected duration of the ELB episode is long. The Phillips curve implied by our model flattens endogenously as the inflation rate falls. This makes it easy to match data from episodes with large negative output gaps and only mild deflation, or positive inflation rates below the central bank’s target. The convexity of the Phillips curve also gets us closer to “explaining” the sharp rise in US inflation in response to adverse-supply shocks in the aftermath of the Covid crisis. The model implies that fiscal multipliers at the ELB are not much larger than unity, and do not grow explosively as we extend the expected duration of the fiscal intervention (and the ELB episode).

In the second chapter, we examine the asymmetric effects of monetary policy at macro and micro levels, a cause of asymmetries, and its policy implications. Our study finds substantial non-symmetric impacts of monetary policy on macroeconomic variables in terms of size and pattern. In particular, the response of inflation and markup to a contractionary shock differ from the response implied by the standard model. Using firm-level data, we provide evidence that financial frictions could be a contributing factor to the observed asymmetry. Our findings are well explained by a New Keynesian model incorporating downward nominal wage rigidity and occasionally binding financial constraints. The model generates interesting policy implications: a larger size of a contractionary shock decreases output more and inflation less. We assess the different speeds of monetary policy normalization. Our model suggests that in times of monetary policy normalization, implementing policy in gradual small steps could reduce output costs and be more effective in curbing inflation.