Download or read book Essays in Macroeconomics Monetary Policy Interest Rate Spreads and Financial Markets written by Fabian Herrmann and published by . This book was released on 2017 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Monetary History Exchange Rates and Financial Markets written by Charles Albert Eric Goodhart and published by Edward Elgar Publishing. This book was released on 2003-01-01 with total page 295 pages. Available in PDF, EPUB and Kindle. Book excerpt: Monetary History, Exchange Rates and Financial Markets is an impressive collection of original papers in honour of Charles Goodhart's outstanding contribution to monetary economics and policy. Charles Goodhart has written extensively on many of these topics and has become synonymous with his field; the chapters within this book offer a summary of current thinking on his own research subjects and include perspectives on controversies surrounding them.

Download or read book Three Essays in Monetary and Financial Economics written by Liang Ma and published by . This book was released on 2022 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation consists of three essays in the field of monetary and financial economics. Specifically, we use high-frequency financial data to study monetary policies with a focus on the information effect, namely, that some of the interest rate movements around central bank announcements are not policy-driven, but are results of the market becoming aware of the central bank's view about future economic prospects. Understanding the role played by the information effect will help us apprehend monetary policy implications in both normal times and extraordinary situations. Chapter 1 evaluates the impact of unconventional monetary policy in the newly developed instrumental variable structural Vector Autoregression (VAR) framework. In the current low interest rate environment, central banks must resort to using unconventional monetary policies, such as forward guidance and quantitative easing, to flight recessions. To empirically evaluate the effectiveness of these unconventional policies, we need to rely on the clean policy shock. A prominent concern is that the often used high-frequency interest rate surprises not only reflect unexpected policy changes, but also contain the information effect. We contribute to the literature by using a heteroskedasticity identification approach, taking advantage of changes in the relative dominance of economic shocks around different macroeconomic announcements. Analysis based on clean policy shocks suggests that the unconventional policies successfully aided the recovery in the U.S. More importantly, we show that the information effect, while it may introduce bias, is rather modest when it comes to estimating the real impact of unconventional monetary policies. Chapter 2 studies the stock return pattern after the U.S. Federal Open Market Committee (FOMC) announcement. This research is motivated by recent literature that documents stock returns drifts, both before and after FOMC announcements, according to policy rate surprises. Indeed, research has shown that the information contained in the central bank announcement is multifaceted: its current monetary policy stances (monetary policy news) and news about future economic prospects (non-monetary policy news). Our contribution is to combine these two strands of literature. To the best of our knowledge, no study has looked at stock market reactions to the non-monetary news stemming from policy announcements. We identify both good and bad news events using a combination of sign restriction with high-frequency financial prices. The novel finding is that following bad FOMC announcements, that is the market interpreted the Fed announcements as revealing negative information about the economy, we observe significant positive stock returns in a 20-day period. We call this the ``post-FOMC drift.'' Further analysis suggests that the drift is likely caused by relatively heightened risks associated with bad announcements, although the drift is consistent with market overreactions as well. Moreover, the post FOMC drift is a market-wide phenomenon and can be exploited in an easy-to-implement trading strategy with a historical record of earning 40\% of the annual equity premium. In Chapter 3, we explore the channels through which the FOMC announcements affect the financial market. While much of the existing literature measures the surprise components with only changes in policy rates (surrounding the announcement), we contribute to the existing literature by taking a broader view through examining unexpected changes in longer-term yields, corporate credit spreads, and inflation expectations (a proxy for growth prospects), using high-frequency financial data. Through a regression analysis, our findings show that these additional surprises provide orthogonal information and sharply increase the goodness of fit in explaining stock returns around FOMC announcements, with the inclusion of inflation expectations having the biggest contribution. The important role of inflation expectation suggests that the current literature, which uses stock prices together with nominal rates to disentangle the information contents of central bank announcements, may be too limited in the scope of information it uses.

Download or read book Essays on the Term Structure of Interest Rates written by Nisha Aroskar and published by . This book was released on 2003 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: Abstract: This dissertation contributes to the study of the term structure of interest rates by addressing some of the gaps in this literature. The term structure is an important channel of monetary transmission. It also contains information about the intertemporal choices made by economic agents. The expectations Hypothesis is the primary explanation in economics that links short term interest rates to long term interest rates. In the first essay I extend the literature by examining the expectations hypothesis in the newly developed financial markets. I find that the expectations theory is not rejected in these markets. This evidence is in sharp contrast to the evidence earlier presented for industrialized countries. Further, contrary to the simple expectations theory, the term premium has high persistence, which is reflected in significantly autoregressive error terms. The evidence also supports the longstanding suggestion that the term premium could be related to the liquidity in the economy. The next essay investigates the forecasting ability of the term spread for future output growth. There appears to be a sharp decline in the predictive power of the term spread in countries that have adopted monetary policy with a stronger response to inflation. To explore the underlying economic reasons for these findings, I explicitly model the information content of the term spread for future output growth based on a structural model. Model calibrations suggest that the forecasting ability of the term spread changes with a change in the persistence and the variance of the underlying economic shocks and in the monetary policy preferences. The last essay focuses on the term structure as a link between short term and long term interest rates in macroeconomic models. I integrate the New Keynesian model and the model of the term structure based on the Intertemporal Consumption Asset Pricing Model. This is a more plausible description of the economy compared to the earlier models. In this model, output responds to an interest rate that includes a time varying term premium which, in turn is associated with economic agents expectations about the future economic variables. Empirical results provide confidence for future research in this direction.

Download or read book Essays in Applied Macroeconomic Theory written by Hugo Vega and published by . This book was released on 2012 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This thesis contains three essays that employ macroeconomic theory to study the implications of volatility, financial frictions and reserve requirements. The first essay uses an imperfect information model where agents solve a signal extraction problem to study the effect of volatility on the economy. A real business cycle model where the agent faces imperfect information regarding productivity is used to address the question. The main finding is that the variance of the productivity process components has a small negative short run impact on the economy's real variables. However, imperfect information dampens the effects of volatility associated to permanent components of productivity and amplifies the effects of volatility associated to transitory components. The second essay presents a partial equilibrium characterization of the credit market in an economy with partial financial dollarization. Financial frictions (costly state verification and banking regulation restrictions), are introduced and their impact on lending and deposit interest rates denominated in domestic and foreign currency studied. The analysis shows that reserve requirements act as a tax that leads banks to decrease deposit rates, while the wedge between foreign and domestic currency lending rates is decreasing in exchange rate volatility and increasing in the degree of correlation between entrepreneurs' returns and the exchange rate. The third essay introduces an interbank market with two types of private banks and a central bank into a New-Keynesian DSGE model. The model is used to analyse the general equilibrium effects of changes to reserve requirements, while the central bank follows a Taylor rule to set the policy interest rate. The paper shows that changes to reserve requirements have similar effects to interest rate hikes and that both monetary policy tools can be used jointly in order to avoid big swings in the policy rate or a zero bound.

Download or read book Essays in Macroeconomics and Finance written by Tom Niklas Kroner and published by . This book was released on 2022 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: My dissertation consists of three independent chapters focusing on empirical questions in macroeconomics and finance. In Chapter 1, I study the role of firms’ uncertainty in the transmission of forward guidance to investment. To do so, I employ a quarterly firm-level panel of U.S. publicly traded firms. I measure forward guidance shocks based on unexpected changes in the slope of the yield curve in a 30-minute window around Federal Reserve announcements. I show that firms which are more uncertain adjust their investment as if they are more pessimistic. More uncertain firms adjust their investment relatively more downward for expected monetary tightenings and relatively less upward for expected loosenings. To explain my empirical findings, I construct a New Keynesian model with a high-uncertainty and a low-uncertainty sector. Agents in the high-uncertainty sector are ambiguous (Knightian uncertain) about the informativeness of forward guidance, and choose to take a pessimistic stance due to their ambiguity aversion. The model implies that expansionary forward guidance is less powerful in recessions due to a larger share of uncertain agents. In Chapter 2, joint with Christoph Boehm, we provide evidence for a causal link between the US economy and the global financial cycle. Using a unique intraday dataset, we show that US macroeconomic news releases have large and significant effects on global risky asset prices. Stock price indexes of 27 countries, the VIX, and commodity prices all jump instantaneously upon news releases. The responses of stock indexes co-move across countries and are large—often comparable in size to the response of the S&P 500. Further, US macroeconomic news frequently explains more than 15% of the quarterly variation in foreign stock markets. The joint behavior of stock prices and long-term bond yields suggests that systematic US monetary policy reactions to news do not drive the estimated effects. Instead, the evidence is consistent with a direct effect on investors’ risk-taking capacity. Our findings show that a byproduct of the United States’ central position in the global financial system is that news about its business cycle has large effects on global financial conditions. In Chapter 3, joint with Christoph Boehm, we are trying to better understand how FOMC announcements affect the stock market. A large literature uses high-frequency changes in interest rates around FOMC announcements to study monetary policy. These yield changes have puzzlingly low explanatory power for the stock market—even in a narrow 30-minute window. We propose a new approach to test whether the unexplained variation represents monetary policy news or just noise. In particular, we allow for a latent “Fed non-yield curve shock”, which we estimate via a heteroskedasticity-based procedure. Using a test for weak identification, we show that our shock is well identified, that is, the unexplained variation is not just noise. We then go on to show that the shock, signed to increase stock prices, leads to sizable declines in the equity and variance premium, an increase in the 10-year term premium, an increase in short-run inflation expectations, as well as a dollar depreciation against multiple non-safe-haven currencies. Hence, the evidence supports the interpretation that the shock affects risk-appetite and leads to a reverse “flight-to-safety” effect. Lastly, using a method from the computational linguistics literature, we show that our shock can be linked to specific topics discussed in FOMC statements, suggesting that it reflects written communication by the Federal Reserve

Download or read book The Federal Reserve System Purposes and Functions written by Board of Governors of the Federal Reserve System and published by . This book was released on 2002 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: Provides an in-depth overview of the Federal Reserve System, including information about monetary policy and the economy, the Federal Reserve in the international sphere, supervision and regulation, consumer and community affairs and services offered by Reserve Banks. Contains several appendixes, including a brief explanation of Federal Reserve regulations, a glossary of terms, and a list of additional publications.

Download or read book Essays in Macroeconomics written by Timothy Moreland and published by . This book was released on 2021 with total page 209 pages. Available in PDF, EPUB and Kindle. Book excerpt: Chapter 1: Financial Consolidation and the Cyclicality of Corporate FinancingWe study the impact of the concentration and complexity of the banking sector on firms' financing and investment behavior over the business cycle. We find that, after the late 1990s, while debt issuance remained procyclical for U.S. firms of all sizes, equity issuance and liquidity accumulation switched from countercyclical to procyclical for small and medium- sized publicly-traded firms. Using matched firm-bank data, we provide evidence that bank consolidation contributed to this change. We rationalize these findings in a general equilibrium business cycle model. After bank consolidation, the weakening in firms' bargaining power and relational ties with banks enhances firms' precautionary demand for liquidity and equity issuance incentives following positive shocks. The change in financing behavior increases investment and employment sensitivity to aggregate productivity shocks.Chapter 2: Monetary Policy and Firm Heterogeneity: The Role of Leverage Since the Financial CrisisWe study how leverage determines firm-level responses to monetary policy. Using both high-frequency financial market and quarterly investment data, we find that the role of leverage in monetary transmission changed around the financial crisis of 2007-09. Firms with high leverage were less responsive to monetary policy shocks in the pre-crisis period but have become more responsive since the crisis. The higher responsiveness is drivenby firms whose leverage is more dependent on long-term debt, suggesting an outsize role for monetary policy affecting long-term funding conditions since the crisis. We also find suggestive evidence for transmission through changes in monetary policy uncertainty.Chapter 3: The International Spillover Effects of US Monetary Policy UncertaintyAn extensive literature studies the international transmission of US monetary policy surprises (shifts in expected path of the policy rate). In this paper we show that changes in uncertainty around the expected path constitute an important additional dimension of spillover effects to global bond yields. In advanced countries, it is the term premium component of yields that responds to uncertainty. We find that this can be explained by an international portfolio balance mechanism. In contrast, for emerging countries it is the expected component of yields that reacts to uncertainty. This can be rationalized from a flight to safety channel. We find heterogeneity in the country-level response to uncertainty only in emerging countries and it is driven by the degree of financial openness. Finally, equity markets in both advanced and emerging countries also respond to US monetary policy uncertainty.

Download or read book Essays on Macro finance Relationships written by Azamat Abdymomunov and published by . This book was released on 2010 with total page 109 pages. Available in PDF, EPUB and Kindle. Book excerpt: In my dissertation, I study relationships between macroeconomics and financial markets. In particular, I empirically investigate the links between key macroeconomic indicators, such as output, inflation, and the business cycle, and the pricing of financial assets. The dissertation comprises three essays. The first essay investigates how the entire term structure of interest rates is influenced by regime-shifts in monetary policy. To do so, we develop and estimate an arbitrage-free dynamic term-structure model which accounts for regime shifts in monetary policy, volatility, and the price of risk. Our results for U.S. data from 1985-2008 indicate that (i) the Fed's reaction to inflation has changed over time, switching between "more active" and "less active" monetary policy regimes, (ii) the yield curve in the "more active" regime was considerably more volatile than in the "less active" regime, and (iii) on average, the slope of the yield curve in the "more active" regime was steeper than in the "less active" regime. The steeper yield curve in the "more active" regime reflects higher term premia that result from the risk associated with a more volatile future short-term rate given a more sensitive response to inflation. The second essay examines the predictive power of the entire yield curve for aggregate output. Many studies find that yields for government bonds predict real economic activity. Most of these studies use the yield spread, defined as the difference between two yields of specific maturities, to predict output. In this paper, I propose a different approach that makes use of information contained in the entire term structure of U.S. Treasury yields to predict U.S. real GDP growth. My proposed dynamic yield curve model produces better out-of-sample forecasts of real GDP than those produced by the traditional yield spread model. The main source of this improvement is in the dynamic approach to constructing forecasts versus the direct forecasting approach used in the traditional yield spread model. Although the predictive power of yield curve for output is concentrated in the yield spread, there is also a gain from using information in the curvature factor for the real GDP growth prediction. The third essay investigates time variation in CAPM betas for book-to-market and momentum portfolios across stock market volatility regimes. For our analysis, we jointly model market and portfolio returns using a two-state Markov-switching process, with beta and the market risk premium allowed to vary between "low" and "high" volatility regimes. Our empirical findings suggest strong time variation in betas across volatility regimes in most of the cases for which the unconditional CAPM can be rejected. Although the regime-switching conditional CAPM can still be rejected in many cases, the time-varying betas help explain portfolio returns much better than the unconditional CAPM, especially when market volatility is high.

Download or read book Essays on Macroeconomics written by Erin L. Wolcott and published by . This book was released on 2017 with total page 120 pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation studies three policy-oriented macroeconomic questions. The first chapter examines whether traditional monetary policy in the U.S. becomes less effective when foreign governments accumulate large amounts of Treasury debt. I estimate a macro-finance model and find foreign official purchases have shifted the entire yield curve down. This suggests the increasing presence of international factors in U.S. financial markets influences the Federal Reserve's interest rate policy. The second chapter asks why low-skilled men are less likely to be employed relative to high-skilled men and why this differential has increased since the 1970s. I build and calibrate a labor-search model and find a demand shift and job separations are the main drivers of employment inequality, while a supply shift had no robust effects, and search frictions actually reduced employment inequality since the 1970s. The third and final chapter studies why wages of newly hired workers are more pro-cyclical than wages of workers who do not switch jobs. We construct a novel measure of occupational mismatch by comparing a newly hired worker's current skill profile to his previous skill profile. Including our measure of occupational mismatch in standard wage regressions can account for half of the new hire wage cyclicality previously documented in the literature.

Download or read book International Capital Flows written by Martin Feldstein and published by University of Chicago Press. This book was released on 2007-12-01 with total page 500 pages. Available in PDF, EPUB and Kindle. Book excerpt: Recent changes in technology, along with the opening up of many regions previously closed to investment, have led to explosive growth in the international movement of capital. Flows from foreign direct investment and debt and equity financing can bring countries substantial gains by augmenting local savings and by improving technology and incentives. Investing companies acquire market access, lower cost inputs, and opportunities for profitable introductions of production methods in the countries where they invest. But, as was underscored recently by the economic and financial crises in several Asian countries, capital flows can also bring risks. Although there is no simple explanation of the currency crisis in Asia, it is clear that fixed exchange rates and chronic deficits increased the likelihood of a breakdown. Similarly, during the 1970s, the United States and other industrial countries loaned OPEC surpluses to borrowers in Latin America. But when the U.S. Federal Reserve raised interest rates to control soaring inflation, the result was a widespread debt moratorium in Latin America as many countries throughout the region struggled to pay the high interest on their foreign loans. International Capital Flows contains recent work by eminent scholars and practitioners on the experience of capital flows to Latin America, Asia, and eastern Europe. These papers discuss the role of banks, equity markets, and foreign direct investment in international capital flows, and the risks that investors and others face with these transactions. By focusing on capital flows' productivity and determinants, and the policy issues they raise, this collection is a valuable resource for economists, policymakers, and financial market participants.

Download or read book Four Essays in Dynamic Macroeconomics written by Qi Sun and published by . This book was released on 2010 with total page 426 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Essays on Macroeconomics and Finance written by Licheng Zhang and published by . This book was released on 2021 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: The dissertation consists of three chapters that study how U.S. and international financial markets are linked to demand shocks, especially to monetary policy during low interest rate periods and how markets respond to changes in the financial and economic environment. The first chapter, "Low Interest Rates and Asset Allocation: Evidence from Mutual Fund Flows" studies the effect of monetary policy on investors' asset allocation decisions by using data on aggregated and disaggregated mutual fund flows. First, we find that following an expansionary monetary policy, both equity funds and bond funds receive large inflows. Specific to asset classes, equity investors move money from large-cap assets to mid-cap and small-cap assets in the near term and then shift assets from domestic to developed and emerging markets. This leads us to the hypothesis that equity investors become more risk-taking when the interest rate is low, we then test this with individual funds panel data, our results indeed confirm this hypothesis. However, bond investors are not risk-taking in response to the expansionary monetary policy. Furthermore, we offer empirical evidence that the Fed's long-lasting zero lower bound (ZLB) policy increases both equity investors' and bond investors' appetite for risk-taking, although it has a much greater impact on bond investors than equity investors. Bond investors change from being risk-averse during the normal interest rate period to become risk-taking during the ZLB period. In the second chapter, "Monetary Policy, Financial Conditions and GDP at Risk" studies the interrelationship between monetary policy, financial conditions, and GDP growth based on crosscountry panel data. The results suggest that a contractionary monetary policy leads to tight financial conditions, which then have significant implications on the downside risks to future GDP growth. However, not all financial conditions variables have equal influence. when consider some specific variables: credit to households, debt securities, effective exchange rate, and open-end fund asset, only credit to households shows a consistently positive effect on near-term GDP growth. The third chapter, "Jobless Recoveries and Time Variation in Labor Markets", coauthored with Irina Panovska, explores how the relationship between output and various labor market inputs has changed over time. We find that the responses of overall employment and unemployment to GDP have became weaker over time. However, the responses on the intensive margin become stronger, and this relationship evolved gradually over time

Download or read book Essays on Macroeconomics and Monetary Economics written by Fatih Tuluk and published by . This book was released on 2016 with total page 138 pages. Available in PDF, EPUB and Kindle. Book excerpt: My essays that are captured in two chapters of my dissertation focus on shadow banking system, collateralized debt arrangement and monetary policy. The first chapter studies the role of shadow banking in the recent financial crisis, the relationship between shadow banking and traditional banking, and it investigates the monetary policy reaction to overcome the financial frictions associated with the scarcity of collateral or shortages of safe assets that naturally led to the liquidity constraints. On the other hand, the second chapter studies the role of housing as a collateral or as a medium of exchange and it explores how the private liquidity, in the context of home-equity loans, and public liquidity work together to overcome the limited commitment frictions. In the first chapter, a Lagos-Wright model with costly-state verification and delegated monitoring financial intermediation, and a risk-sharing framework of banking is constructed. Lack of memory and limited commitment imply collateralized credit arrangements. In contrast to the traditional banking system, shadow banking system is not subject to the capital requirements. The relative use of shadow funded credit versus traditional bank loans entails the advantages of working outside the oversight of the bank regulations, but drawbacks of having information and transactions cost in funding entrepreneurs. I have five main findings: First, an entrepreneurial credit can help address the need for collateral. Second, the shadow funded credit shifts from risky to safer borrowers and loan creation capacity of the shadow banking sector shrinks when the economic outlook gets worse. Third, the traditional bank can fulfill the role of providing credit that shadow banks had played before the crisis, but can do it only to a certain extent. Fourth, to the extent that collateral backed by entrepreneurial credit mitigates the limited commitment friction in the traditional banking sector, the optimal monetary policy shifts nominal interest rate towards zero lower bound. Lastly, the quantitative easing program can be welfare increasing by reinforcing the shadow funded credit versus traditional banking lending if the credit frictions in the shadow banking sector are sufficiently small. The second chapter studies the role of home-equity loan and government debt in an environment with financial frictions. I construct a Lagos-Wright model in which private transactions must be secured under limited commitment and lack of record-keeping. Housing can be useful to support credit since it serves as collateral. It also gives direct utility as shelter and serves as a medium of exchange when the economy is inefficient. I show that when there is no efficiency loss due to exchange of housing, posting collateral is not optimal since collateralizable wealth is limited. In the state of efficiency loss, the collateral might be useful and the asset therefore bears a liquidity premium. However, once collateral becomes scarce - as it did during the financial crisis- then it amplifies the frictions and the buyer trades the asset to make up for the weak incentives associated with collateral. I show that the world is always non-Ricardian and therefore government debt implies higher welfare. As well, government debt enhances the private debt to the extent that posting collateral is always optimal. In equilibrium, full pledgeability of private collateral, in addition to government debt, completely rules out the efficiency loss arising from exchange of asset. Money and private banks are introduced. I show that as inflation imposes a tax on consumption, interest rate on cash loans imposes a tax on housing collateral. Finally, an increase in inflation raises the housing price near Friedman Rule.

Download or read book Three Essays in Macroeconomic History written by J. W. Mason and published by . This book was released on 2014 with total page 197 pages. Available in PDF, EPUB and Kindle. Book excerpt: Following Minsky, an economy can be understood as a set of units linked to each other by flows of money payments and by the commitments to future payments reflected on balance sheets. This dissertation offers three accounts of the historical evolution of the US economy, conceived of a network of balance sheets, over the course of 20th and early 21st century. The first essay looks at changes in the pattern of payment flows between nonfinancial corporations and financial markets associated with the ``shareholder revolution" of the 1980s. It argues that the shift in payouts to shareholders from a quasi-fixed stream of dividends to a claim on every dollar actually or potentially available to the firm, has had important effects on the behavior of aggregate investment; in particular, it has weakened the link between corporate investment, on the one hand, and earnings and credit conditions, on the other. The second essay looks at household debt. It argues that that the evolution of household debt-income ratios must be understood as a monetary phenomenon and not merely the reflection of developments in ``real" expenditure and income. Decomposing the changes in household debt since 1929 using an appropriate accounting framework shows that changes in household behavior account for only a small part of the trajectory of household leverage over the past 80 years. The third essay applies this same broad perspective to the historical evolution of interest rate spreads. It argues that from a Keynesian perspective that regards interest as fundamentally the price of liquidity, there is no conceptual basis for picking out the difference in yield between money and a short-term government bond as``the" interest rate; there are many other pairs of asset yields the difference between which is determined on the same principles, and may have equal macroeconomic significance. This perspective helps make sense of the increasing gap between the policy rate and the interest rates facing most private borrowers.

Download or read book Essays on Banking and Monetary Economics written by Mengbo Zhang and published by . This book was released on 2021 with total page 298 pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation consists of three chapters on banking and monetary economics. In Chapter 1, I study whether monetary policy is less effective in a low interest-rate environment. To answer this question, I examine how the passthrough of monetary policy to banks' deposit rates has changed, during the secular decline in interest rates in the U.S. over the last decades. In the data, the passthrough increased for about one third of banks, and decreased for the rest. Moreover, the deposit-weighted bank-average passthrough increased under a lower interest rate. I explain this observation in a model where banks have market power over loans and face capital constraints. In the model, when interest rates are low, the passthrough falls as policy rates fall, only in markets where loan competition is high. Hence, the overall passthrough depends on the distribution of loan market power. I confirm the model's prediction using branch-level data of U.S. banks. This channel also impacts the transmission of monetary policy to bank lending under low interest rates. In Chapter 2 (joint with Tsz-Nga Wong), we document a new channel mediating the effects of monetary policy and regulation, the disintermediation channel. When the interest rate on excess reserves (IOER) increases, fewer banks are intermediating in the Fed funds market, and they intermediate less. Thus, the total Fed funds traded decreases. Similarly, disintermediation happens after the balance sheet cost rises, e.g. the introduction of Basel III regulations. The disintermediation channel is significant and supported by empirical evidence on U.S. banks. To explain this channel, we develop a continuous-time search-and-bargaining model of divisible funds and endogenous search intensity that includes the matching model (e.g. Afonso and Lagos, 2015b) and the transaction cost model (e.g. Hamilton, 1996) as special cases. We solve the equilibrium in closed form, derive the dynamic distributions of trades and Fed fund rates, and the stopping times of entry and exit from the Fed fund market. IOER reduces the spread of marginal value of holding reserves, and hence the gain of intermediation. In general, the equilibrium is constrained inefficient, as banks intermediate too much. In Chapter 3 (joint with Saki Bigio and Eduardo Zilberman), we compare the advantages of lump-sum transfers versus a credit policy in response to the Covid-19 crisis. The Covid-19 crisis has lead to a reduction in the demand and supply of sectors that produce goods that need social interaction to be produced or consumed. We interpret the Covid-19 shock as a shock that reduces utility stemming from "social" goods in a two-sector economy with incomplete markets. For the same path of government debt, transfers are preferable when debt limits are tight, whereas credit policy is preferable when they are slack. A credit policy has the advantage of targeting fiscal resources toward agents that matter most for stabilizing demand. We illustrate this result with a calibrated model. We discuss various shortcomings and possible extensions to the model.

Download or read book Essays in Macroeconomics written by and published by . This book was released on 2015 with total page 352 pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation has three self-contained chapters in macroeconomics. In the first chapter, I develop a two-sector dynamic stochastic general equilibrium (DSGE) model where the housing sector is subject to search and matching frictions. These frictions amplify the response of residential construction to all economic shocks. Further, the interest rate spread between mortgages and risk free bonds transmits monetary policy to the housing market. An expansionary monetary policy shock reduces this spread, increasing the demand for homeownership and spurring new residential construction. I test the qualitative predictions of the DSGE model by estimating a factor-augmented vector autoregression and identifying the structural monetary policy shocks with an external instrument. Consistent with the DSGE model, an expansionary monetary policy shock reduces the interest rate spread between mortgages and Treasury bonds. In the second chapter, I study time series models for forecasting residential investment. I estimate standard univariate and multivariate models and propose an error correction model (ECM) based on the stock-flow relationship of housing starts, completions and units under construction. The root mean squared prediction errors (RMSPEs) of the models are compared along with the RMSPEs of the Survey of Professional Forecasters (SPF) and the Federal Reserve's Greenbook. For the 1981:Q3 to 2013:Q2 sample, the ECM improves upon the competing time series models and makes modest improvements to the SPF. For the 1981:Q3 to 2007:Q4 sample, the ECM performs comparably to the Greenbook. In the third chapter, I study the implication of two stylized facts of the U.S. economy. First, nominal prices in the services sector change less frequently than those in the goods sector. Second, the size of the services sector relative to the goods sector has increased over the last 50 years. In a two-sector new Keynesian model, these facts imply that interest rate shocks should have a larger impact on output in more recent time periods. In contrast to this implication, impulse response functions of U.S. GDP to Federal Funds rate shocks estimated using both vector autoregressions and factor-augmented vector autoregressions are larger in the 1959 to 1979 time period than in the 1983 to 2007 time period.