Essays in Macroeconomics

Abstract

The Political Economy of Currency Unions:<br /> How can a currency union be sustained when member states have an exit option? This paper derives how fiscal and monetary policies can ensure the survival of a common currency, if countries want to leave the union. A union-wide central bank can prevent a break-up by setting interest rates in favor of the country that wants to exit. I show how a central bank does this by following a monetary rule that features time-varying country weights. The paper demonstrates that a central bank can only sustain the union for a while, but not permanently. Fiscal transfers between countries are more effective, as they sustain the currency union also in those situations in which monetary policy fails to do that.<br /> Inflation, Interest Rates and the Choice of the Exchange Rate Regime:<br /> What is the impact of the exchange rate regime on inflation, interest rates and economic activity? In this paper we provide novel evidence surrounding the gains of a pegged exchange rate regime. We first emphasize that countries with a fixed exchange rate regime tend to have persistently lower inflation and interest rates. In addition to that, we document that volatility of nominal variables is lower with a fixed exchange rate. Last we find that countries that enter a fixed exchange rate regime tend to experience a subsequent increase in GDP growth. We rationalize these findings with a calibrated small open economy model that emphasizes the lack of commitment of central banks when the exchange rate is flexible. In such a regime, an inflationary bias arises that lowers consumption. Pegging the exchange rate to a stable anchor lowers inflation and its volatility by a similar magnitude as in the data. This persistent decline in inflation is beneficial for the economy and leads to an increase in GDP.<br /> Consumption Inequality in the Digital Age:<br /> This paper measures digital technology in the consumption basket of American households and quantifies its share along the income distribution. We find that rich household have a larger digital share in their consumption basket than poor households. In a model, we quantify the effects of lower prices for digital assets on lifetime consumption for rich and poor households. Abstracting from the impact of digitization on income inequality, we find that the reduction in prices for digital assets alone increased consumption inequality by a large margin.