ESSAYS IN MACROECONOMICS AND MONETARY POLICY: TOPICS AND CHALLENGES FOR CENTRAL BANKS

This dissertation comprises six essays in macroeconomics, the culmination of my studies of monetary policy, financial frictions, and international macroeconomics. It is perhaps an orthodox view, but I have come to believe that the primary purpose of macroeconomics is to understand economic fluctuations and to inform the design of policy. I hope these essays serve as an ode to this view; at the core of each, readers will find an application of the New Keynesian framework. The New Keynesian framework has come under much scrutiny in recent years, and understandably so: my fellow doctoral students and I have witnessed not one but two macroeconomic crises during our most formative years. As I write this foreword, a third may well be brewing, driven by a combination of factors including another episode of financial market overvaluation, high public debt, continual global supply chain disruptions, and ongoing geopolitical tensions. I understand, perhaps more than most, the scepticism about the New Keynesian framework's ability to explain these phenomena. Nevertheless, I believe the New Keynesian framework remains invaluable. It is remarkably adaptable to new empirical evidence and theoretical developments. Like most paradigms, in economics or elsewhere, it is a powerful tool that must be applied appropriately. My concern is that we, as macroeconomists, risk throwing the baby out with the bathwater: abandoning the framework because of its poor performance when misapplied in the 2010s and early 2020s would be a mistake. Over the past few years, I have met many doctoral students who express no interest in the New Keynesian framework or lack even an intermediate understanding of it. I find this odd and troubling. It is precisely because these are such turbulent times that we must remain vigilant and keep a firm grasp of the intuition the New Keynesian framework offers about the macroeconomy. It cannot speak to, say, recent developments driven by micro data, but it remains a powerful tool for understanding aggregate prices, output, and interest rates. I should make clear that my views on the function of macroeconomics and the strengths of the New Keynesian model differ from how I view the core purpose of economics as a discipline. While it may seem at odds with my orthodox view of macroeconomics, I believe that we – as economists more broadly – must avoid dogmatism when confronting the more fundamental and pressing questions of our time: global wealth and income inequality, fascism and the shortcomings of capitalism in the 21st century, racial and sexual justice, and peace and the sanctity of human life and rights. Economists have not been vocal enough on these issues, and I think this has created a vacuum for nefarious political actors to exploit. I now briefly describe each chapter. The chapters are ordered chronologically, by when I wrote them or completed a first draft, and each is self-contained and can be read independently: Chapter 1: Gone with the Wind: Monetary Policy and the Global Financial Cycle. This chapter grew out of my MPhil dissertation at the University of Oxford. The core research question is unchanged: how important is the exchange rate regime in buffering the domestic economy from global financial cycles? The approach and methodology, however, have been substantially updated. I build a small open economy New Keynesian model to inform the Mundellian Trilemma versus Dilemma debate and, as a key contribution, estimate it on South Korean data with an occasionally binding constraint. I also use nonlinear solution methods that allow agents to behave precautionarily to avoid hitting the constraint, in stark contrast to other papers, which typically estimate models with ‘always-binding’ constraints. To the best of my knowledge, this is the first paper to study the interaction among global financial cycles, the Mundellian Trilemma, and occasional episodes of financial crisis or stress. I find that the Mundellian Trilemma remains relevant, and that the economy's dynamics depend not only on the exchange rate regime but also on whether it is in a crisis or stress regime. Chapter 2: Cryptocurrencies in Emerging Markets: A Stablecoin Solution? (co-authored with Ganesh Viswanath-Natraj; published in the Journal of International Money and Finance, June 2025). Motivated by El Salvador's 2021 experiment in making Bitcoin legal tender, which increased financial inclusion at the cost of a volatile medium of exchange, we study the macroeconomic effects of introducing cryptocurrencies in a workhorse small open economy model. The model builds on my experience with the bank financial frictions of Aoki, Benigno, and Kiyotaki and of Akinci and Queralto in open economy settings. Relative to an economy without cryptocurrency, introducing a low-volatility currency such as a stablecoin yields net welfare gains for the unbanked population, whereas a high-volatility currency such as Bitcoin yields net welfare costs. Cryptocurrency adoption attenuates the transmission of both domestic and foreign monetary policy, and flexible exchange rates provide an effective buffer against cryptocurrency price shocks. Our findings rationalise the growing use of stablecoins in emerging markets as a hedge against macroeconomic uncertainty. Chapter 3: CBDCs, Financial Inclusion, and Optimal Monetary Policy (co-authored with Ganesh Viswanath-Natraj and Ivan Shchapov; revision requested at Macroeconomic Dynamics). This chapter is a natural follow-up to the previous one, written as I became more familiar with the Gertler–Kiyotaki–Karadi financial frictions framework and the heterogeneous agent literature. We study the interaction between monetary policy and financial inclusion in an economy that introduces a central bank digital currency (CBDC). Using a two-agent New Keynesian framework with banked and unbanked households, we show that a CBDC gives the unbanked a more efficient savings device with which to smooth consumption, raising welfare. Under Ramsey optimal policy, the CBDC rate is set at a constant spread to the policy rate. We identify a policy trade-off: a higher CBDC rate benefits the unbanked but disintermediates banks and reduces the welfare of banked households. Taken together, our findings highlight the importance of tailoring CBDC design to an economy's level of financial inclusion. Chapter 4: Productivity over the Life-Cycle and its Effects on the Interest Rate (co-authored with Momo Komatsu and Ivan Shchapov; published in the Japanese Economic Review, special issue on Heterogeneity and Macroeconomics, February 2025). This chapter builds on the Blanchard–Yaari–Gertler overlapping generations framework and began as my master's dissertation at Keio University. That early version was quite simple, with almost no role for fiscal transfers. Given the pressing challenges of demographics and fiscal sustainability, however, my co-authors and I rewrote the paper and extended it substantially. Japan has faced rapid ageing, persistently low interest rates, sluggish growth, and deflation for decades, while the productivity of young and elderly workers has gradually converged. Using an overlapping generations two-agent New Keynesian (OTANK) DSGE model, we explore the relationship between productivity, demographic shifts, and interest rates in Japan during the post-bubble era. The narrowing productivity gap between younger and older cohorts puts upward pressure on interest rates, whereas longer life expectancy and negative population growth push them down; the latter effect dominates. A central bank that fails to account for this when setting monetary policy may induce deflationary pressure. Two policy implications emerge: raising productivity over workers' entire life-cycle and bridging the gap between younger and older workers can help offset the decline in interest rates, and monetary policy ought to account for shifting demographics. Chapter 5: Restoring Existence and Uniqueness at the Effective Lower Bound with Simple Fiscal Policy (co-authored with Ivan Shchapov and Yifan Zhang; second-round revision requested at the Journal of Economic Dynamics and Control). My interest in the nonexistence and multiplicity of equilibria began when I worked as a research assistant for Guido Ascari and Sophocles Mavroeidis on their paper ‘The Unbearable Lightness of Equilibria in a Low Interest Rate Environment’, later published in the Journal of Monetary Economics. Around the same time, I began researching nonlinear solvers – most notably OccBin – and the numerical difficulties posed by the effective (or zero) lower bound (ELB). In New Keynesian models, the occasionally binding ELB constraint often leads to multiple equilibria or none. The problem stems from a strong feedback loop between expectations of inflation and output and current outcomes at the ELB. We show that simple fiscal policy rules can introduce additional stabilising forces that dampen this loop, thereby ensuring the existence and uniqueness of a minimum state variable (MSV) solution. Chapter 6: Global Determinacy According to HANK (co-authored with Ivan Shchapov and Yifan Zhang). A natural follow-up to the previous chapter, this chapter builds on the approach of Ascari and Mavroeidis (2022) to test whether Bilbiie's workhorse tractable heterogeneous agent New Keynesian (HANK) model exhibits multiplicity or nonexistence of MSV solutions in the presence of an occasionally binding constraint – in this case, the ELB. We show that the HANK model generally suffers from the same nonexistence or multiplicity problem as the representative agent New Keynesian model. However, when calibrated to have procyclical income and consumption inequality, such that aggregate demand is inverted, the HANK model has a unique MSV solution and satisfies local determinacy conditions – a property we term global determinacy.