| The main part of this thesis examines how the monetary authority's objectives affect macroeconomic time-series. The data can then reveal the true intentions of past policymakers. Macroeconomic data reflect some convolution of private-sector and policy behavior over the past. Therefore, simple reduced form correlations are not invariant to policy changes. Only by modeling explicitly policy objectives can we hope to disentangle one effect from the other. The first two chapters analyze an objective function that has been widely studied in another setting. Barro and Gordon (1983) described how joint targets for inflation and output can lead to overshooting of the inflation target without any benefit to output. A large literature has followed, seeking how to overcome this time-consistency problem. But the model's time-series implications have been ignored. The first chapter, written with Robert Barro, embeds these objectives in a simple macroeconomic model. Using post-war U.S. time-series data, we estimate that the weight on price-surprises (which generate higher output in the model) is less than that on inflation but still significantly positive. In principle, then, reforms that allow the monetary authority to commit itself will alter the behavior of inflation-- discretion is costly. The second chapter discovers more about these costs by using plausible dates for regime breaks, associated with shifts in the authority's weight on inflation. I find that discretion has little effect on the level of inflation but is still costly because of its effects on the variability of inflation. The closing chapter in the thesis, written with Michael Kremer, discusses the effects of housing taxation on investment in equipment. The tax treatment of owner-occupied housing is often considered too favorable, because it distorts saving towards housing and away from equipment. We point out that low taxes on owner-occupied housing may boost aggregate saving, by encouraging renters to buy housing. An appropriately targeted tax regime, which we argue resembles those in the U.S. and the U.K., can isolate this effect, and avoid encouraging existing owner-occupiers to buy bigger houses. |