| Summary: | The goal of this dissertation is to analyze issues that arise when policy makers try
to learn about the economy while their policies are affecting it. The dissertation takes
the form of three essays.
The first essay examines how optimal policy affects equiUbrium economic outcomes
in environments in which agents are both imperfectly informed about the state of the
economy and able to learn by observing the actions of others. This type of environment,
in which there is social learning, has received growing attention, but to date there has
been little examination of strategic policy making in such settings. In particular, the
question of whether policy, in the absence of a commitment technology, can be designed
to increase the speed of information revelation remains open. The essay builds on a
real options model of investment and shows how this framework can be extended to
derive time consistent policies and the related equilibrium outcomes in social learning
environments. By comparing the equilibrium induced by a policy maker to both the
laissez-faire outcome and the social optimum, it is shown that the policy maker is able
to achieve the second best outcome and reduce delay to the efficient level even in the
absence of commitment.
The second essay raises the question of whether the fact that policy makers play
a dual role, as both information gatherers and economic managers, can explain the
flattening of the Phillips Curve relationship between inflation and real activity that
has been observed in both Canada and the U.S. over the 1990s. The paper models
the central bank as both a provider of liquidity in a world where pre-set prices would
otherwise cause potential gains from trade to go unrealized and a gatherer of information
about real developments in the economy. The bank's information complements that of
private agents so that, the central bank and private agents both wish to learn from the
other. In equilibrium, this interaction gives rise to a Phillips curve relationship which
both exhibits causality running from real activity to prices and justifies a feedback from
prices to the setting of monetary instruments. The model implies that a decline in the
slope of the Phillips curve may be a result of improvements in the manner in which
central banks gather information about the economy. An investigation of the data for
Canada and the U.S. finds support for the model.
The third essay attempts a more thorough empirical investigation of the issues raised
in the previous chapter. The paper enriches the dynamic aspects of the model to further
examine its properties, but focuses mainly on attempting to uncover whether the types
of changes to the Phillips curve relationship which had been previously documented in
Canada and the U.S. have occurred in other OECD countries. The paper investigates this
question using both single country and panel estimation and finds that the phenomenon
of a declining slope in the Phillips curve relationship is prevalent in OECD countries
throughout the 1980s and 1990s. Finally, the paper attempts to exploit the cross country
data to provide more formal tests of the model's predictions regarding policy innovations
and inflation targeting regimes. The results suggest that the model compares favourably
to other potential explanations of the decline in the slope of the Phillips curve. === Arts, Faculty of === Vancouver School of Economics === Graduate
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