The first chapter of this dissertation discusses the interest semi-elasticity of money demand which has been a long standing puzzle in the monetary economics literature. The puzzle arises since researchers consistently have estimated low short-run semi-elasticities, usually around 1, and high long-run semi-elasticities of 10. To explore the elasticity puzzle, I formulate and estimate a model of the demand for money in which re-balancing money holdings between money for purchases and money for financial investment is costly. I model this re-balancing cost by assuming that households face time-dependent rules when updating money holdings. I estimate the resulting money demand equation by employing generalized method of moments. My estimates for the short-run and long-run interest semi-elasticities are 0.96 and 12.62, respectively. When I apply my model of money demand to explain the increase in the volatility of real balances after 1980, my model indicates that the late-1970s financial innovations, which facilitated portfolio re-balancing, lie behind this rise.In chapter two, I study the effects of a monetary shock in an economy characterized by heterogenous labor schedules and non-separability between consumption and labor in the utility function. I applied the same approach outlined in the previous chapters to deal with household heterogeneity arising from wealth differentials. Compared to competing models in the literature, the estimated version of my model fits better the responses of output, consumption, and wages after a monetary shock. Notably, my model requires no adjustment cost in investment, and smaller degrees of habit formation preference for consumption, and wage stickiness than other standard RBC models. Furthermore, I show that non-separability is an important source of amplification of the effects of a monetary shock on output and investment.
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