Essays on regulation in macroeconomics

This thesis is composed of three papers that explore the macroeconomic implications of regulating externalities. The first two papers aim to contribute to the literature on the interaction between macroeconomic and environmental policies, focusing on alternative policies to control pollution. In the third paper, we extend the discussion on price versus quantity controls to the realm of capital inflow control measures. In the first paper, we explore the interaction of monetary policy and a regulatory policy for controlling pollution within an economy populated with financially constrained producers exhibiting heterogeneity in production technology and pollution rates. Environment related components of the model include pollution externality, an abatement technology and environmental policy in the form of tax on pollutants. Our analysis is organized around two main topics: assessing the effect of monetary policy on social welfare in the presence of environmental concerns and investigating how the existence of pollution-type externality and environmental regulation influences optimal monetary policy. Our findings suggest that in the presence of heterogeneity, due to its distributional impact, monetary policy can play a role in enhancing social welfare and complementing regulatory efforts to mitigate pollution. The primary question of interest in the second paper revolves around how the economy featuring a partial cash-in-advance constraint in the labor market responds to productivity shocks under different regulatory policies and how the extent of nominal rigidity affects this response. We employ a stochastic general equilibrium model featuring nominal rigidity in the form of partial cash-in-advance constraint in the labor market, pollution associated with production activity, and an abatement effort. Environmental policies include a price policy (tax) and a quantity policy in the form of cap-and-trade system. Our key findings are twofold. First, volatility in macro variables is higher under price regulation compared to quantity regulation. Under quantity regulation, the cost of controlling pollution is positively associated with output. This channel reduces the response of labor and all other variables to productivity shocks. Second, we demonstrate that as the degree of nominal rigidity increases, volatility increases under both regulations but relatively more so under price regulation. In the third paper, we explore the impact of a capital inflow shock under different control measures. We employ a small open economy model incorporating learning-by-doing externality in the tradable sector. Under the competitive equilibrium, consumption and external borrowing in the model exceed the socially optimal amount. Under the price regulation, the regulator's role is to set a tax on external borrowing. With quantity regulation, the regulator establishes a cap on aggregate external borrowing and issues borrowing permits, which households demand in the spot market. Under both regulations, there is information asymmetry as the regulator sets the policy before observing the interest rate. Agents, however, make decisions after observing the shock. The third paper aims to contribute in two ways: First, drawing insights from the literature on price versus quantity controls, we compare welfare implications of price (tax) and quantity-type regulation (cap-and-trade) for capital inflows. Second, we point out the concept of a market-based regulatory framework for capital inflows. We demonstrate that there is less volatility under quantity regulation and, in terms of utility, quantity policy outperforms price policy in the short-run. This superiority arises from the shape of the social welfare function and ex-post variation in external debt under price regulation. Furthermore, the ranking of policies is influenced by the initial productivity level. Regarding social welfare, quantity type control performs better than price control when the initial productivity level is low. Moreover, the relative advantage of price over quantity policy declines with an increase in the pace of technology growth.