Essays in central bank policymaking

Across a large number of developing and developed countries, the monetary authority or the central bank has started playing an increasing role. In this dissertation, I look at some of the important issues facing central banks across the world today.;Chapter 1 investigates the presence of simple monetary policy rules that perform well when the policymaker of a small open economy is uncertain about certain key issues like inflation and output, gap persistence and expectation formation. The paper finds that simple interest rate rules optimized for a particular model perform extremely well if the policymaker correctly identifies the structure of the economy. However, if the policymaker is wrong about the structure of the economy, then these rules perform disastrously. Looking at sub-optimal deviations of these rules, the paper concludes that while a policymaker of a closed economy can design rules that perform well across a range of models, the policymaker of a small open economy is unable to design such rules. The economic cost of choosing the wrong model is significantly higher in a small open economy and the policymaker must invest greater resources to learn about the true structure of the economy.;Most of the recent research in monetary policy has focused on the use of a single exogenously specified loss function to evaluate monetary policy performance. This literature has come to the conclusion that backward looking models are more difficult to control. Chapter 2 tests the validity of this conclusion, using both an exogenous loss function and a welfare theoretic endogenous loss function. The results show that the conclusions vary markedly with different types of loss functions. Looking into the case where the policymaker is uncertain about the pricing behavior of the firms, the chapter investigates the presence of robust policy rules. Again the results indicate that the existence of robust rules depend crucially on the type of loss function used to evaluate outcomes.;Chapter 3 investigates the relationship between capital account openness and inflation since the 1980s. It argues that widespread capital account liberalization during the last two decades appear to have contributed to the worldwide disinflation observed during the same period. The chapter builds a theoretical model to motivate the presence of a negative link between capital account liberalization and inflation. It tests the prediction of the theoretical model by employing static and dynamic panel data procedures. Capital account openness appears to discipline monetary authorities, or to help them convince the private sector that they will be more disciplined in the future.