We analyze the effects of heterogeneity in price setting behavior in time-dependent sticky price and sticky information models characterized by quite general adjustment hazard functions. In a large class of models that includes the most commonly used price setting specifications, heterogeneity leads monetary shocks to have larger real effects than in one-sector economies with the same frequency of adjustments. Quantitatively, the effects of heterogeneity in models calibrated to match the recent empirical evidence on pricing behavior are large, even in the absence of strategic complementarity in price setting. We find that the degree of monetary non-neutrality in the calibrated heterogeneous economies can be as large as in an otherwise identical one-sector economy with roughly three times more nominal rigidity.

In the current thesis I investigate the impact of sectoral structure of the economy on some aspects of its short-run fluctuations and long-run trends. In the first chapter -- "Cost Structure and Price Rigidity across Sectors"--I model a mechanism through which the structure of costs of producers can affect producers' decisions on the frequency of adjusting prices. First, I establish an empirical observation that sectors which are characterized by either a higher share of labor or more diversified structure of bundles of intermediate goods are characterized by more rigid prices. Then I build and solve a partial equilibrium model that describes optimal price-setting strategies of firms in different sectors. The model provides an explanation for heterogeneity in price rigidity across different sectors. The calibrated model can be used for predicting how changes in the production processes and in the structure of costs can affect the heterogeneity of price rigidity across sectors and, hence, the aggregate price rigidity in the economy. In the second chapter -- "Technological Spillovers and Dynamics of Comparative Advantage"--I investigate the question of the evolution of sector productivity and comparative advantage under the presence of cross-sector technological spillovers. For that I develop a dynamic model of international trade with cross-sector spillovers. In addition to the standard effect of comparative advantage on labor allocation, the model accounts for the effects of labor allocation on the sector productivity and comparative advantage. The core mechanism is a combination of an idea-generating process within each sector and technological spillovers across sectors. I establish necessary and sufficient conditions for the existence and uniqueness of a balanced growth path and describe the conditions under which a welfare-improving industrial policy is possible. I calibrate the model using the US patent data to parametrize the strength of technological spillovers and use the model to describe the optimal industrial policy.

In an estimated two-sector New-Keynesian model with durable and nondurable goods, an inverse relationship between sectoral labor mobility and the optimal weight the central bank should attach to durables inflation arises. The combination of nominal wage stickiness and limited labor mobility leads to a nonzero optimal weight for durables inflation even if durables prices were fully flexible. These results survive alternative calibrations and interestrate rules and point toward a non-negligible role of sectoral labor mobility for the conduct of monetary policy.

United States monetary policy has traditionally been modeled under the assumption that the domestic economy is immune to international factors and exogenous shocks. Such an assumption is increasingly unrealistic in the age of integrated capital markets, tightened links between national economies, and reduced trading costs. International Dimensions of Monetary Policy brings together fresh research to address the repercussions of the continuing evolution toward globalization for the conduct of monetary policy. In this comprehensive book, the authors examine the real and potential effects of increased openness and exposure to international economic dynamics from a variety of perspectives. Their findings reveal that central banks continue to influence decisively domestic economic outcomes—even inflation—suggesting that international factors may have a limited role in national performance. International Dimensions of Monetary Policy will lead the way in analyzing monetary policy measures in complex economies.

The classic introduction to the New Keynesian economic model This revised second edition of Monetary Policy, Inflation, and the Business Cycle provides a rigorous graduate-level introduction to the New Keynesian framework and its applications to monetary policy. The New Keynesian framework is the workhorse for the analysis of monetary policy and its implications for inflation, economic fluctuations, and welfare. A backbone of the new generation of medium-scale models under development at major central banks and international policy institutions, the framework provides the theoretical underpinnings for the price stability–oriented strategies adopted by most central banks in the industrialized world. Using a canonical version of the New Keynesian model as a reference, Jordi Galí explores various issues pertaining to monetary policy's design, including optimal monetary policy and the desirability of simple policy rules. He analyzes several extensions of the baseline model, allowing for cost-push shocks, nominal wage rigidities, and open economy factors. In each case, the effects on monetary policy are addressed, with emphasis on the desirability of inflation-targeting policies. New material includes the zero lower bound on nominal interest rates and an analysis of unemployment’s significance for monetary policy. The most up-to-date introduction to the New Keynesian framework available A single benchmark model used throughout New materials and exercises included An ideal resource for graduate students, researchers, and market analysts