Essays in applied macroeconomics
Title: Essays in applied macroeconomics
Author: MERTENS, Karel
Citation: Florence, European University Institute, 2007
Series/Number: EUI PhD theses; Department of Economics
The first chapter, 'How the Removal of Deposit Rate Ceilings Has Changed Monetary Transmission in the US: Theory and Evidence' is concerned with US monetary history and the impact of institutional changes in the late 1970s and early 1980s on the monetary transmission mechanism. The chapter presents evidence on a phenomenon of disintermediation occurring during the major recessions in the 1960s and 1970s, but absent ever since. Using a novel data set, I show that disintermediation is closely linked to the existence of deposit rate ceilings that were imposed under regulation Q of the Federal Reserve System. Disintermediation potentially has real effects if the resulting shortage of loanable funds forces banks to cut back on lending to borrowers that rely on intermediated finance. The main hypothesis of Chapter 1 is that regulation-induced disintermediation affected the monetary transmission mechanism during the 1960s and 1970s and provided the Federal Reserve with greater leverage over real activity than afterwards. In a monetary DSGE model that incorporates deposit rate ceilings as occasionally binding constraints, I show how the regulation alters the behavior of money aggregates and exacerbates the drop in economic activity following a monetary tightening. The results of a threshold VAR lend support to the main theoretical predictions of the model. This chapter contributes to establishing the existence and nature of changes in the conduct and transmission of monetary policy since the mid 1980s, which is key in understanding the remarkable macroeconomic performance of the US since then. Chapter 2, titled 'The Role of Expectations in Sudden Stops', studies the abrupt declines in capital inflows, usually accompanied by depression-sized, but short-lived, contractions in economic activity, that have plagued so many countries in the last 25 years. It proposes a new framework for the analysis of these 'Sudden Stops' and applies it to the case of the Korean Crisis in 1998. The chapter presents a flexible-price small open economy model that faces a 'peso problem' in productivity states. Agents rationally adjust their beliefs about future productivity growth after the arrival of news. A downward revision of expectations triggers a Sudden Stop, together with large declines in GDP, employment, consumption and investment. One of the distinctive features of the model is that there need not be any actual change in productivity growth to generate large fluctuations. Quantitatively, the model goes a long way in matching the 1998 Korean Crisis and subsequent swift recovery by considering a sudden deterioration of expectations about the future. The last chapter, 'Business Cycle Analysis and VARMA Models', is joint work with Christian Kascha and is more methodological in nature. We address the question whether long-run identified Structural Vector Autoregressions (SVARs), which are a popular tool in applied macroeconomics, can in practice discriminate between competing models. Some authors have recently suggested that SVARs may fail to do so partly because they are finiteorder approximations to infinite-order stochastic processes. We estimate VARMA and state space models, which are not misspecified, using simulated data and compare true with estimated impulse responses of hours worked to a technology shock. We find little gain from using VARMA models. However, state space models do outperform SVARs. In particular, subspace methods consistently yield lower mean squared errors, although even these estimates remain too imprecise for reliable inference. Our findings indicate that longrun identified SVARs perform weakly because of small sample problems, not because of the finite-order approximation.
LC Subject Heading: Macroeconomics -- Methodology
Defence date: 3 December 2007; Examining board: Prof. Giancarlo Corsetti, EUI, Supervisor ; Prof. Wouter Den Haan, University of Amsterdam ; Prof. Mark Gertler, New York University ; Prof. Rick Van der Ploeg, EUI; First made available online 4 June 2015.
Type of Access: openAccess