Essays on Economic Dynamics and Policy Problems

In these essays, I consider the economic dynamics that have important implications to policy problems. I use the dynamic optimization and computational methods to answer questions related to interesting economic problems.;In the first essay, "Optimal Monetary Policy with Labor Market Frictions and Real Wage Rigidity: the Role of the Wage Channel," I use a monetary dynamic stochastic general equilibrium (DSGE) model to consider the Ramsey-optimal monetary policy. I introduce right-to-manage bargaining into the labor search model instead of efficient bargaining, and find that price stability is restored in the Ramsey-optimal monetary policy without real wage rigidity. Right-to-manage means that firms can adjust hours per worker and have a labor demand schedule on real wages. The wage channel makes price markups stable by smoothing hiring cost, and real wages and hours per worker are determined as if they are in the Walrasian labor market with a variable wage markup. With real wage rigidity, wage markups are countercyclical and volatile, and deviation from price stability is optimal. Whereas a trade-off between stabilizing inflation and stabilizing unemployment with endogenous price markups is important for the optimal volatility of inflation in efficient bargaining, wage markups and labor market inefficiencies, stemming from real wage rigidity via the wage channel, play a crucial role in right-to-manage bargaining.;The second essay, "Sustainable Pricing in a Durable Goods Monopoly," studies a dynamic model of monopoly and the monopolist's optimal policy. Ausubel and Deneckere [1989. Reputation in bargaining and durable goods monopoly. Econometrica 57, 511-531] showed that the monopoly profit is approximately sustainable when agents are patient enough and the length of time is small enough. I consider the case in which these conditions do not hold, and examine the short-run dynamics, which are, to my knowledge, neglected in previous studies. I find that the sustainable pricing is intermediate between the monopolistic pricing and the Markov-perfect pricing, and the monopolist quotes the price between the monopolistic price and marginal costs for every period until the market is satiated. At a low discount factor, the sustainable pricing converges to marginal costs, but very slowly. At a sufficiently high discount factor, the speed of convergence becomes arbitrarily slow, which is consistent with Ausubel and Deneckere's result. I also consider the effect of introducing depreciation and stochastic marginal cost into the model.;The third essay, "Applying the Explicit Aggregation Algorithm to Discrete Choice Economies," considers a DSGE model again, but with more detailed dynamics with heterogenous agents. I apply the explicit aggregation algorithm in Den Haan and Rendahl [2010. Solving the incomplete markets model with aggregate uncertainty using explicit aggregation. Journal of Economic Dynamics and Control, 69-78] to discrete choice economies, such as lumpy investment models of plants studied in Khan and Thomas [2008. Idiosyncratic shocks and the role of nonconvexities in plant and aggregate investment dynamics. Econometrica 76, 395-436]. The explicit aggregation algorithm can solve heterogeneous agent models in less computation time, by obtaining the forecasting rules for the aggregate state of the economy directly from the individual decision rules, without considering the distribution of plants. Although the individual decision rules in discrete choice models exhibit high nonlinearity, the explicit aggregation algorithm yields similar results in terms of the aggregate and plant-level moments, as compared to the standard Krusell and Smith algorithm with sampling the distribution of plants. I also show that the explicit aggregation algorithm is useful for estimation by solving the model repeatedly with each different parameter set.