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This thesis consists of four chapters. Each chapter covers a topic in international macroeconomics and monetary policy. The first chapter investigates the impact of unexpected monetary policy shocks on exchange rates in a multi-country econometric model. The second chapter examines the linkage between macroeconomic fundamentals and exchange rates through the monetary policy expectation channel. The third chapter focuses on the international transmission of bank and corporate distress. The last chapter unfolds the interest rate channel of monetary policy transmission in-an emerging economy-China, where regulations and market forces co-exist in this transmission.
This dissertation introduces in chapter 1 a new comparative approach to model-based research and policy analysis by constructing an archive of business cycle models. It includes many well-known models used in academia and at policy institutions. A computational platform is created that allows straightforward comparisons of models’ implications for monetary and fiscal stabilization policies. Chapter 2 applies business cycle models to forecasting. Several New Keynesian models are estimated on historical U.S. data vintages and forecasts are computed for the five most recent recessions. The extent of forecast heterogeneity for models and professional forecasts is analysed. Chapter 3 extends the forecasting analysis to a long sample and to the evaluation of density forecasts. Weighted forecasts are computed using a variety of weighting schemes. The accuracy of forecasts is evaluated and compared to professional forecasts and forecasts from nonstructural time series methods. Chapter 4 adds a new feature to existing business cycle models. Specifically, a medium-scale New Keynesian model is constructed that allows for strategic complementarities in price-setting. The role of trade integration for monetary policy transmission is explored. A new dimension of the exchange rate channel is highlighted by which monetary policy directly impacts domestic inflation. Chapter 5 tests whether simple symmetric monetary policy rules used in most business cycle models are a sufficient description of reality. I use quantile regressions to estimate policy parameters and find asymmetric reactions to inflation, the output gap and past interest rates.
In my dissertation I study the transmission of monetary and fiscal policy in New Keynesian DSGE models. In the first chapter we revisit the exchange rate channel in a two-country model of the U.S. and a panel of industrialized countries to analyse how monetary policy transmission in the U.S. changes if it becomes more trade integrated. We find that more openness lowers the sacrifice ratio, although the effect is quantitatively small and depends on the pricing of the firms. In the second chapter we simulate the impact of the U.S. fiscal stimulus package in 2009 on GDP. We find that the government spendingmultiplier is well below 1. The finding is robust to including rule-of-thumb consumers and simulating the stimulus in the recent recession. In the third chapter we collect the fiscal stimulus measures in the eleven biggest countries of the euro area. Then we do a robustness study by simulating the european package in five different models of the euro area. The macroeconomic models vary in terms of backward-looking decision making of the agents and openness. Our findings provide no support for a Keynesian multiplier. Instead they suggest that additional government spending will reduce private spending for consumption and investment purposes. If government spending faces an implementation lag, the initial effect on GDP may even be negative. In the fourth chapter I estimate a DSGE model for Germany and compute forecasts for the debt-to-GDP ratio. I find that the expected economic recovery will lead to a decrease in Germany’s indebtedness in the medium-term given that policy makers stick to the fiscal policy rules.
This dissertation consists of three essays, which study the relation between stock prices and the macroeconomy using vector autoregressions (VARs). The first essay focuses on the link between stock prices and the current account. I find that stock markets provide a channel, in addition to the traditional exchange rate channel, through which external balance for a country with a current account imbalance can be restored. The second essay explores the transmission of U.S. stock price shocks to real activity and prices in G-7 countries. I achieve identification by imposing a small number of sign restrictions on impulse responses, while controlling for monetary policy, business cycle and government spending shocks. The results suggest that stock price movements are important for fluctuations in G-7 real activity and prices, but do not qualify as demand side business cycle shocks. The third essay investigates the impact of monetary and technology shocks on the stock market. I find an important role for technology shocks, but not monetary shocks, in explaining variations in real stock prices. The identification method is flexible enough to study the effects of technology news shocks. The responses are consistent with the idea that news on technology improvements have an immediate impact on stock prices.