Job Market Paper: Optimal Monetary Policy with Signal Extraction In this paper we study the optimal discretionary monetary policy under partial information (PI) where the central bank can only extract information from an endogenous signal, price inflation. The signal is determined in equilibrium by the policy rate and the unobserved supply and demand shocks. We solve for optimal policy in a non-linear model where the Phillips curve is bent by asymmetric wage adjustment costs and the “certainty equivalence” principal that prevails in linear models cannot be applied. Optimal policy prescribes that the central bank should raise the interest rate gradually when price inflation is low but respond strongly when it is high. This non-linearity arises because signal extraction interacts differently with optimal policy depending on the price inflation observed.
Work in progress: Optimal Fiscal Policy with Ricardian and Hand-to-mouth Agents We study the optimal fiscal policy in a model with two types of agents who are dif- ferent in their access to the financial markets: Ricardian agents have full access to the financial markets while the hand-to-mouth agents are constrained and could only consume their labor income in each period. We find that the optimal labor-tax is more volatile compared with a representative-agent economy without physical capital and the volatility is captured by the equilibrium condition that these two types of agents are imposed with the same proportional labor tax. When capital is introduced to this economy, we find that in the long run capital tax should still be zero in the deterministic case. But the ex-ante capital tax in the stochastic economy is again disturbed by the same proportional labor tax condition, which makes it fluctuate around zero instead of staying there.