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Essays on dynamic macroeconomics : from structural parameter estimation to the evaluation of Central Bank policies
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Florence : European University Institute, 2025
EUI; ECO; PhD Thesis
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CASTELLANOS, Juan, Essays on dynamic macroeconomics : from structural parameter estimation to the evaluation of Central Bank policies, Florence : European University Institute, 2025, EUI, ECO, PhD Thesis - https://hdl.handle.net/1814/78032
Abstract
The thesis is composed by three independent essays on Dynamic Macroeconomics. The first chapter is related to the estimation of structural parameters within a DSGE model. A Monte Carlo study is implemented to examine the small sample performance of IRF matching and Indirect Inference estimators that target impulse responses (IRFs) that have been estimated with Local Projections (LP) or Vector Autoregression (VAR). The analysis considers various identification schemes for the shocks and several variants of LP and VAR estimators. Results show that the lower bias from LP responses is a big advantage when it comes to IRF matching, while the lower variance from VAR is desirable for Indirect Inference applications as it is robust to the higher bias of VAR-IRFs. Overall I recommend the use of Indirect Inference over IRF matching when estimating DSGE models as the former is robust to potential misspecification coming from identification assumptions, small sample or incorrect lag selection. In the second chapter, joint with Andrew Hannon (ECB) and Gonzalo Paz-Pardo (ECB), we build a model of the aggregate housing and rental markets in which house prices and rents are determined endogenously. Households can choose their housing tenure status (renters, homeowners, or landlords) and the size of their homes depending on their age, income and wealth. We use our model to study the impact of changes in credit conditions on house prices, rents and household welfare. We analyze the introduction in Ireland in 2015 of policies that limited loan-to-value (LTV) and loan-to-income (LTI) ratios of newly originated mortgages and find that, consistently with empirical evidence, they mitigate house price growth but increase rents. Homeownership rates drop, and young and middle-income households are negatively affected by the reform. An unexpected permanent rise in real interest rates has similar effects – by making mortgages more expensive and alternative investments more attractive for landlords, it increases rents relative to house prices. The third chapter, joint with Stephen Millard (NIESR) and Alexandra Varadi (BoE), offers a structural approach to the following questions: how does the strength of monetary policy depend on the mortgage interest fixation period? And how it is affected by credit conditions? In many countries the most common mortgage contract neither has a fixed nor a fully adjustable rate. The typical interest fixation period varies between two to ten years. We embedded such a contractual arrangement into a DSGE with long term mortgage debt and loan-to-value (LTV) and payment-to-income (PTI) constraints to study the effects of monetary policy as well as its interaction with those borrower-based macro-prudential limits. After calibrating the model to the United Kingdom, we find that: (i) the interest fixation period and the tightness of credit conditions do not matter if monetary policy shocks are transitory, (ii) looser credit limits and shorter fixation periods amplify the redistributive effects of inflation target shocks that increase nominal rates persistently, and (iii) LTV limits act as a backstop to the high sensitivity of PTI limits to monetary policy, especially when the interest fixation period is short.
Table of Contents
-- 1. Local Projections vs. VARs for Structural Parameter Estimation
-- 2. The Aggregate and Distributional Implications of Credit Shocks on Housing
-- 3. The Role of Mortgage Interest Fixation Periods for Monetary & Macro-prudential Polices and Rental Markets
-- Appendix
Additional Information
Defence date: 12 February 2025
Examining Board: Prof. Russell Cooper (European University Institute, supervisor); Prof. Ramon Marimon (European University Institute, co-supervisor); Prof. Martin Eichenbaum (Northwestern University); Prof. Gianluca Violante (Princeton University)
Examining Board: Prof. Russell Cooper (European University Institute, supervisor); Prof. Ramon Marimon (European University Institute, co-supervisor); Prof. Martin Eichenbaum (Northwestern University); Prof. Gianluca Violante (Princeton University)