Essays in the business cycle

This thesis consists of three essays. The first essay examines the welfare cost of inflation in an economy where agents hold money by the motivation of transaction service. I formulate and estimate a transactions cost function from the post-war U.S. data. I find that for moderate inflation, 1.5 percent of output is misallocated to provide transactions service and overall welfare cost amounts to 1.7 percent of output, compared to Friedman's rule. While the welfare cost is found to be quite large, it remains bounded at high inflation. The model economy is otherwise very similar to the standard neoclassical model, except that the volatility of the price level is increased and is highly negatively correlated with output.; The second essay investigates the real effect of money through the credit channel in another version of monetary dynamic equilibrium model. It incorporates a debt contracting problem with asymmetric information into a standard monetary business model. The model incorporates a limited participation assumption in order to induce a persistent liquidity effect of monetary shocks and propagate monetary disturbances. I find a liquidity effect: a positive money supply shock generates a decrease in nominal interest rates and an increase in output level. Money growth shocks also lead to a decrease in the spread between borrowing and lending rates by decreasing the bankruptcy point, which, in turn, amplifies the response of capital. When the monetary shock is an innovation to reserve requirements, it induces persistent response of capital and output.; The third essay explores the dynamics of savings, investment and the trade balance. Empirical regularities in international data show a high saving-investment correlation, together with a countercyclical trade balance. To investigate this aspect in the context of a real business cycle model, I develop a two-country version of a human capital growth model. I find that the model economy produces a significant positive correlation between saving and investment because the real return of investment depends not only on the technological shock but also on human capital accumulation. In addition, I find that the trade balance is countercyclical due to persistent investment.