Essays in applied macroeconomics

Abstract

This thesis studies the interaction between the real economy and assets like housing and bonds, and provide a new methodology to assess more accurately the spillovers from financial markets to the real economy. The first chapter analyses of the role of expectations of future fundamentals in the housing market and their macroeconomic implications. News represent the component of expectations that proves to be correct in the future. Noise constitutes the component of expectations that does not materialize in the future. I find that fundamentals in the housing market are aligned with the real economy and that news shocks are the dominant driver of the housing market in the long run. However, the bulk of fluctuations in housing prices at high-medium frequencies is generated by noise. Notably, the latest housing cycle of the 2000s is entirely driven by expectations unrelated with fundamentals. The second chapter, jointly written with Alejandro Vicondoa, develops a novel methodology, called Bridge Proxy-SVAR, to study the relationship between time series sampled at different frequencies. Instead of using a joint system, we rely on two systems at different frequencies and bridge them through an instrumental variable approach. We carry out identification at the highest available frequency and study the responses of the macroeconomic aggregates in a second stage. Our analytical, simulation and empirical results show that the Bridge Proxy-SVAR significantly mitigates temporal aggregation biases and it is particularly appealing to study the financial spillovers to the real economy. In fact, in the third chapter, jointly written with Alejandro Vicondoa, we provide novel evidence on the large macroeconomic spillovers from changes in the liquidity of bonds. In particular, we analyze Italian sovereigns and find that liquidity shocks, orthogonal to changes in default risk, generate strong recessionary effect. Liquidity and default risk affect the real economy through different channels. By analyzing survey data, we find that liquidity shocks, differently from spikes in yields, do no lead to an increase in the rate requested by banks for loans. On the other hand, banks make their deadlines tighter and reduce the amount available for loan because they report problems with the liquidity and asset position.