Essays on monetary policy transmission mechanisms in open and closed economies

The first paper presents a general equilibrium model with sticky prices and a non-Walrasian labor market. The main characteristic of the labor market in this model is the existence of a search friction that results in a positive equilibrium rate of unemployment. The model is able to generate a positive co-movement between inflation and employment as well as the observed correlation pattern between job creation, job destruction and employment. The model is utilized to analyze the transmission of different shocks on the labor market, both, under flexible prices and when prices are sticky.; The second paper analyzes the positive and normative implications of the degree of openness of a small economy for the transmission mechanism of monetary shocks. First, I show empirical evidence on the direct relationship between openness and the degree of exchange rate pass-through. Then, I develop a general equilibrium model where countries do not fully specialize according to their comparative advantages. With this framework I show that incomplete specialization makes the pass-through from exchange rate to import prices imperfect. The less open is the country—the less specialized—the lower is the pass-through from exchange rate to import prices. Despite the fact that the pass-through is incomplete and the expenditure switching effect is diminished, the flexible price allocation can still be reached with an inward-oriented monetary policy.; The third paper develops a small open economy model where a domestic traded goods sector coexist together with a Non-traded goods sector. In both sectors prices are sticky, and each one is subject to specific productivity shocks. In this framework the flexible price allocation cannot be reached by means of a single monetary policy instrument. Therefore, the central bank faces a trade-off between stabilizing inflation in each of these two sectors. When the share of Non-traded goods is low, a Taylor rule outperforms a strict inflation targeting regime. However, both rules are dominated by a rule that moves aggressively the interest rate in response to core inflation. On the other hand, if the share of Non-traded goods is high then the optimal is to completely stabilize consumer price inflation.