Essays in macroeconomics

Abstract

In the first two chapters of this thesis we analyze the impact of an increase in transfer payments - i.e., fiscal stimulus in a form of direct payments to individuals - on budget deficits. In the first chapter we study this issue theoretically and show that in a model with the cash-in-advance constraint on consumption and downward nominal wage rigidity the transfers multiplier is positive when the economy is below its full employment level. Increasing transfers in these circumstances relaxes the cash-in-advance constraint and effectively undoes the inefficiency caused by the wage rigidity. Since this results in higher income and consumption which are both taxed, the fiscal stimulus can possibly be self-financing - it pays for itself in a form of increased tax revenue. We also perform a quantitative analysis and show that under a plausible calibration of the model when the economy is far enough from the full employment, the transfer multipliers are large enough for the tax revenue to increase sufficiently so that the fiscal stimulus largely finances itself. In the second chapter we analyze the self-financing nature of transfer payments empirically and estimate the impulse response functions of GDP, unemployment, consumption and debt to an increase in transfer payments on quarterly data from 1959Q2 to 1991Q4 using the local projection method and exogenous transfers shocks. We show that the stimulus in a form of higher transfers has more pronounced effects when unemployment is high than when it is low. Permanent transfers seem not to affect debt, while temporary transfers are estimated to reduce it after an initial increase, especially in the high unemployment regime - an increase in temporary transfers seems to be not only self-financing, but actually reducing debt when the economy recovers. The third chapter is related to a different topic: we analyze how the terms of trade (TOT) - the ratio of export prices to import prices - affect total factor productivity (TFP). We provide empirical macroeconomic evidence based on the times series SVAR analysis and microeconomic evidence based on industry level data which shows that the terms of trade improvements are associated with a slowdown in the total factor productivity growth. Next, we build a theoretical model in which terms of trade improvement results in putting more resources into physical goods production at the expense of the research and development (R&D) sector, which in turn has a negative impact on knowledge development.