Browsing by Author "Rubio-Ramírez, Juan F"

This dissertation investigates computational methods for macroeconomic asset pricing models. It demonstrates that advances in economic modeling often require advances in computation and highlights a particular case where more demanding computational methods are required to solve an economic model. It also discusses advances in computational technology that allow researchers to utilize solution methods that would have been previously infeasible. In particular, it demonstrates the wide applicability and potential gains of GPU computing, a parallel computing framework, and applies those tools to a computationally challenging model which investigates trading volume in a general equilibrium, complete-markets economy where agents have heterogeneous beliefs.

This dissertation consists of my essays in macroeconomics. In the first essay, I develop a new general equilibrium model to explain several facts about aggregate inventory that are challenging to existing inventory models. This work highlights the importance of taking into account consumers' search behavior in understanding aggregate inventory dynamics. In the second essay, I adapt a Markov-switching vector autoregression (MS-VAR) to uncover detailed asymmetries embedded in inventory dynamics. This work further demonstrates the shortcomings of existing inventory models and points to new directions in improving inventory models.

During 2007-2009 the U.S. economy experienced the most severe financial crisis since the Great Depression. Why did the financial crisis turn into such a severe recession? And what were the causes of the Great Recession? This dissertation consists of two essays examining these questions. In the first essay I study the extent to which the increase in uncertainty might have contributed to the severity of the crisis. The second essay examines the reasons behind the fall in the personal saving rate as measured in the National Income and Product Accounts.

In the first essay I study the effects of changes in uncertainty on optimal financing and investment in a dynamic firm financing model in which firms have access to complete markets subject to collateral constraints. Entrepreneurs finance projects with their net worth and by issuing state-contingent securities, which have to be collateralized with physical capital. An increase in uncertainty leads to deleveraging, as entrepreneurs reduce their demand for external financing and fund a larger share of their investment from net worth. Upon an increase in uncertainty, investment initially falls as entrepreneurs decrease the scale of their projects. Investment recovers as entrepreneurs build up net worth and transition into an environment with high uncertainty. Quantitatively, changes in uncertainty have large effects on optimal leverage and investment dynamics.

The spendthrift nature of U.S. households leading up to the financial crisis has been cited as a major contributing factor for the Great Recession. Indeed, the personal saving rate has been falling since the end of the 1970s, dropping to as low as nearly 1 percent before the financial crisis. The reasons behind the decline in the personal saving rate have yet to be understood, and thus constituting an important puzzle for economic research. In the second essay, joint work with Maurizio Mazzocco, we provide a potential explanation for the decline in the personal saving rate. Specifically, we show that a single variable can potentially explain the decline in the U.S. personal saving rate from 10 percent in the early eighties to nearly 1 percent in 2007. This variable is medical expenditure by health institutions net of the employers' contributions to pension and insurance funds. Furthermore, if we differentiate between contributions to pension funds and to health plans, we find that the main reason behind the dramatic reduction in the U.S. personal saving rate is the stagnation of employers' contributions to pension funds that started in the early eighties combined with the sharp rise in expenditure by health institutions.

This dissertation consists of two essays in macroeconomics. In the first essay, I explain the increase in the interbank market credit spreads during the recent financial crisis using a model with endogenous default, in which banks with different default risk borrow at different interest rates. I compare a normal times stationary equilibrium and a crisis times stationary equilibrium. In normal times there is no spread in the interbank market, because the default probability of banks is zero. In crisis times some banks default, and an interbank credit spread arises endogenously. The interbank credit spread is positively correlated with leverage and debt size, and negatively correlated with expected cash flows. Using this framework, I study the effects of equity injections, debt guarantees, and liquidity injections on the interbank credit spreads and on risky projects financed by banks. I find that debt guarantees are effective in reducing interbank credit spreads in times of crisis, but not in stimulating investment. In contrast, interbank credit spreads are relatively unresponsive to injections of equity and of liquidity; however, these policies are successful in stimulating investment.

In the second essay, I study the capacity of the Taylor principle to guarantee determinacy in the class of New Keynesian models typically used for monetary policy analysis, when firms are not able to index their prices. In a model with labor, capital accumulation, capital adjustment costs, and capital utilization, the necessary conditions for trend inflation to affect determinacy are as follows: trend inflation is above 4%, firms are not able to index their prices, and the frequency of price changes is less than once a year. Introducing sticky wages, it is possible to find a response to inflation greater or equal than one that guarantees determinacy; however, the determinacy region is small and indeterminacy can arise even when the response to inflation is higher than one for one.

This dissertation is a collection of essays with the main objective of estimate and understand macroeconomic behavior of emerging countries by the lenses of modern tools in general equilibrium modeling.

In the first chapter, I study whether structural parameters of Small Open Economy Real Business Cycle models are constant when applied to Emerging Markets data. Using data from Argentina, I estimate a small open economy model with trend shocks and working capital constraints, augmented with time varying parameters. I find that so called ``structural" parameters suffer substantial changes in the period 1983-2008. Structural instabilities arise from both technological and financial sources. Given these findings, I inquire which are the features of the data that parameter drifts capture. I review emerging markets facts and find parameter instabilities play a key role in addressing for the variability observed in the data.

In the second chapter, I study policy changes in emerging countries. Motivated by the repeated stabilization programs implemented by emerging economies during the last 30 years, I develop a dynamic stochastic general equilibrium model with Markov-Switching to study fiscal and monetary policies in emerging economies. I estimate the model for Mexico and find strong evidence of policy changes. Two Regimes are identified. The Active Monetary Policy Regime (AMP), in which monetary and fiscal policies respond to inflation and government debt, respectively; and the Active Fiscal Policy Regime (AFP), in which fiscal policy does not respond to government debt and monetary policy does not respond to inflation. AMP holds during short periods of time after macroeconomic crises during the 80s and 90s, and for a long period after 2002. The rest of the periods, AFP is in effect. I find that switches from AFP to AMP have strong stabilization effects at the cost of high output losses. Moreover, credibility in the persistence of the regime change is key to assess the effectiveness of the stabilization program.

This dissertation asks whether frequency misspecification of a New Keynesian model

results in temporal aggregation bias of the Calvo parameter. First, when a

New Keynesian model is estimated at a quarterly frequency while the true

data generating process is the same but at a monthly frequency, the Calvo

parameter is upward biased and hence implies longer average price duration.

This suggests estimating a New Keynesian model at a monthly frequency may

yield different results. However, due to mixed frequency datasets in macro

time series recorded at quarterly and monthly intervals, an estimation

methodology is not straightforward. To accommodate mixed frequency datasets,

this paper proposes a data augmentation method borrowed from Bayesian

estimation literature by extending MCMC algorithm with

"Rao-Blackwellization" of the posterior density. Compared to two alternative

estimation methods in context of Bayesian estimation of DSGE models, this

augmentation method delivers lower root mean squared errors for parameters

of interest in New Keynesian model. Lastly, a medium scale New Keynesian

model is brought to the actual data, and the benchmark estimation, i.e. the

data augmentation method, finds that the average price duration implied by

the monthly model is 5 months while that by the quarterly model is 20.7

months.

This dissertation presents two essays on Markov-Switching dynamic stochastic general equilibrium models.

The first essay is "Perturbation Methods for Markov-Switching Models," which is co-authored with Juan Rubio-Ramirez, Dan Waggoner, and Tao Zha. This essay develops an perturbation-based approach to solving dynamic stochastic general equilibrium models with Markov-Switching, which implies that parameters governing policies or the environment evolve over time in a discrete manner. Our approach has the advantages that it introduces regime switching from first principles, allows for higher-order approximations, shows non-certainty equivalence of first-order approximations, and allows checking the solution for determinacy. We explain the model setup, introduce an iterative procedure to solve the model, and illustrate it using a real business cycle example.

The second essay considers a model with financial frictions and studies the role of expectations and unconventional monetary policy during financial crises. During a financial crisis, the financial sector has

reduced ability to provide credit to productive firms, and the central bank may help lessen the magnitude of the downturn by using unconventional monetary policy to inject liquidity into credit markets. The model allows agents in the economy to expect policy changes by allowing parameters to change according to a Markov process, so agents have expectations about the probability of the central bank intervening during a crisis, and also have expectations about the central bank's exit strategy post-crisis.

Using this Markov Regime Switching specification, the paper addresses three issues. First, it considers the effects of different exit strategies, and shows that, after a crisis, if the central bank sells off its accumulated assets too quickly, the economy can experience a double-dip recession. Second, it analyzes the effects of expectations of intervention policy on pre-crisis behavior. In particular, if the central bank commits to always intervening during crises, there is a loss of output in pre-crisis times relative to if the central bank commits to never intervening. Finally, it considers the welfare implications of committing to intervening during crises, and shows that committing can raise or lower welfare depending upon the exit strategy used, and that committing before a crisis can be welfare decreasing but then welfare increasing once a crisis occurs.

This dissertation computes the optimal monetary and fiscal policy for small open and emerging economies in an estimated medium-scale model. The model departs from the conventional approach as it encompasses all the major nominal and real rigidities normally found in the literature in a single framework. After estimating the model using Bayesian techniques for one small open economy and one emerging economy, the Ramsey solution for the optimal monetary and fiscal policy is computed. Results show that foreign shocks have a strong influence in the dynamics of emerging economies, when compared to the designed optimal policy for a developed small open economy. For both economies, inflation is low, but very volatile, while taxes follow the traditional results in the literature with high taxes over labor income and low taxes for capital income.