In this paper, a simple search model of the labor market is combined with sticky prices to investigate the dynamic response of the economy to nominal interest rate shocks. The framework allows the respective roles of labor market search, nominal price rigidities, and policy inertia in accounting for the impact of monetary policy shocks to be studied. Labor market rigidities introduced by the process of matching job seekers with job vacancies amplify the real impact and reduce the inflation impact of a monetary policy shock. As a result, significantly less price rigidity is required; for example, the dynamic response of output and inflation in the new Keynesian model with a Walrasian labor market and only 15% of firms optimally adjusting prices each period can be replicated in the labor market search model when a more realistic 50% of firms optimally adjust their price each period.

This paper surveys the implications of uncertainty for the design of monetary policy. Among the topics discussed are the impact of imperfect or noisy information on the performance of simple rules, the performance of rules that are robust to the exogenous disturbance processes, the effects of parameter uncertainty, and the implications of robust control. The analysis is conducted using a new Keynesian framework. One finding is that difference rules seem to perform well in the presence of imperfect information about the output gap.

This research analyzes efficacy of the macroeconomic policies and the role of policymakers to deal with a recessionary case. In particular, it focuses on the instruments policymakers have in hand to stimulate the economic activity. It does the quantitative multiplier analysis for economies with various forms of financial market imperfections to provide a greater degree of realism into macroeconomic modeling. The first chapter analyzes efficacy of a fiscal policy tool, a tax cut in particular, in a liquidity trap scenario where monetary expansion is ineffective. It basically answers a question, as to when the zero-lower-bound is binding and the conventional monetary policy is not working, whether the discretionary fiscal policy is really ineffective as has recently been argued. The second chapter focuses on unconventional monetary policy in a closed economy and researches a question as to whether certain assumptions regarding constraints and rigidities amplify or mitigate the macroeconomic or real effects of unconventional monetary policy. The third chapter examines the macroeconomic effects of a social security reform. It analyzes contributions from different forms of changes; quantifies the macroeconomic implications of various reforms. Scenario analysis reveal positive effects for labor supply, capital stock and output to the reform implemented.

The dissertation consists of three chapters, with emphasis on analyzing macro- and micro-level data and applying econometric techniques so as to measure treatment effects and draw a causal inference.

The first chapter estimates the causal impacts of tax policy changes on the US post-war macroeconomy by exploring the permanent and exogenous tax changes identified by the narrative approach. In a state-dependent model estimated by local projections method, the tax multiplier effects are allowed to differ conditional on the contemporary economic conditions. The empirical findings show that the impulse response of output to tax shocks is significantly weaker and more sluggish when the US economy is in a recession than when it is in an expansion. I also find evidence suggesting that such asymmetry in the multiplier impacts happens as the result of a relatively smaller and slower response of private investment to tax policy changes during periods of recession. While no strong difference is found regarding the impulse responses of private consumption to tax changes under different economic conditions. These results are robust with respect to alternative model assumptions and specifications. Thus, the research indicates that tax policies constitute a more effective fiscal tool for economic adjustment in a booming economy instead of a dwindling one.

The second and third chapters are joint work with Baizhu Chen and study the fast-growing online lending market. In the second chapter, we estimate the effect of credit insurance on the online peer-to-peer (P2P) lending market. Online lending is a fast growing area of alternative finance. However, it is often plagued by asymmetric information problems and high credit risk, especially in developing countries that do not have well-established financial and credit rating systems. To address this issue, some Chinese P2P marketplaces have incorporated loan insurance into their online platforms. We estimate the treatment effects of credit insurance on the P2P market by exploiting a unique quasi-experiment. Specifically, loan guarantees gradually became available on a top Chinese P2P lending platform to borrowers from 31 major cities between 2012 and 2014 through 12 waves of business expansion. Our empirical results suggest that the availability of credit insurance resulted in significant, strong, and persistent treatment effects on the market demand and supply. The adoption of credit insurance was associated with dramatic increases in the number of loan listings, funding probability per loan, and bidding amount per lender. The average funding time per loan decreased by as large as about 170 hours.

The third chapter utilizes a unique dataset of P2P lending with detailed loan and borrower information to study which borrower characteristics lenders value when choosing loans to fund and whether lenders value characteristics that minimize the probability of default. We begin by presenting a theoretical model (1) to help illustrate the behavior of lenders and borrowers in a P2P market and (2) to derive a reduced form model for empirical analysis. In the model, lenders make ex ante funding decisions to maximize their subjectively expected returns while borrowers decide whether or not to default ex post. The subjective expectation is formulated based on the observed borrower characteristics and loan information. As a result, we can evaluate lenders' funding decision by comparing for different borrower traits the associations to funding and default probabilities. In the empirical part, the online enables unbiased estimation of borrower characteristics that lenders favor as we observe all the information that lenders know about their borrowers. However, estimating characteristics that predict loan default is problematic due to selection at the funding stage. To address this issue, we exploit the exogenous variation in the probability of funding caused by contemporaneous competition on the platform. The results imply that P2P lenders consider employment borrower characteristics as most important when making funding decisions, but disregard several characteristics that are valuable predictors of default risk. Specifically, lenders overestimate the importance of verified employment information and underestimate the importance of verified education level and marital status.

This dissertation consists of the three essays that allowed me to investigate three different economics phenomena. The discussion focuses on topics related to U.S. bank deregulation, China's resource misallocation and currency carry-trade strategy. In particularly, the aim is to study how U.S. bank deregulation is related to Great Moderation in U.S. between the mid-1980s and the start of the subprime debt crisis in 2007, what the implication of monetary policy with China's resource misallocation is and how a new carry trade method can be constructed.

The first paper models the effect of bank deregulation on the volatility of output and firms dynamics. By introducing a cost channel and bank sector into Bilbiee, Ghironi and Melitz (2007)'s model, we test the volatility change under various shocks before and after bank deregulation. Simulations show that with the bank spread decreases by 1/3, the volatility of output and number of producers decrease significantly. This can provide a potential explanation for why the Great Moderation starts from the mid-1980s to mid-2000s.

The second paper constructs a dynamic stochastic general equilibrium model of China with heterogeneous sectors and resource misallocation. Recent literature has shown that there is significant resource misallocation between state-owned firms and private firms in China. We find the presence of resource misallocation alters standard monetary policy conclusions in important ways. We show that there is an additional real effect of monetary policy--- an allocation effect. This is different from the standard New Keynesian framework, where the real effect comes from the price rigidity. Monetary policy shocks also exert heterogeneous effects on private firms and state-owned firms. Given a common shock, the output volatility of private firms is higher than that of state-owned firms. The model can easily be extended to other developing countries with similar situations.

The third paper employs two methods to construct a portfolio for carry trade strategy. The first one is the minimal variance, subject to specific return and weights constraints. The other is the maximal R square, subject to the weights constraints. Using MATLAB, we can calculate the optimal weights, returns and Sharpe ratio for these two methods. By comparing the Sharpe ratio for different time intervals, we find that the overall maximal R square strategy is relatively more accurate than the minimal variances strategy. This provides an alternative method to construct a carry trade portfolio.