Browsing by Subject "Monetary policy"

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.

My Ph.D. dissertation is composed of two chapters studying how monetary policy influences asset prices.

The first chapter empirically explores the effects of the Federal Reserve (Fed)'s large-scale asset purchasing (LSAP) program on the cross-section of equity returns through financial intermediaries' funding liquidity. Using the LSAP shock by Swanson (2017) as a policy measure and the Liquidity Mismatch Index by Bai et al. (2017) as a funding liquidity measure of intermediaries, I show that an expansionary policy shock increases the stock return of banks with low liquidity more than those with high liquidity. In addition, the liquidity of lenders also influences their borrowers' equity prices through their sticky loan contracts. Firms borrowing from low liquidity banks, and of high loan-to-asset ratio earn relatively higher returns under the same expansionary shock. The response of borrowers is weaker, more delayed, and more persistent than that of lenders. These findings collectively provide supportive evidence of the bank lending channel as a policy transmission mechanism in the quantitative easing period.

The second chapter theoretically analyzes how monetary policy feedback rule can influence the risk premium of financial assets in a New Keynesian general equilibrium model where a firm's default is endogenously determined from the limited liability of stockholders, and nominal price and wage rigidity exist. A productivity (monetary policy) shock shifts supply (demand) curve, causing output comove positively (negatively) with inflation. A policy rule to output and inflation determines the magnitude of output response to those shocks, determining the price of risk and the procyclicality of dividend. Higher (lower) inflation and lower (lower) output feedback lead to higher equity premium driven by a productivity (policy) risk. This trend is robust to the source of nominal rigidity. Under a baseline calibration, the model generates 1.76% (1.87%) of the annual levered (unlevered) equity risk premium, indicating an endogenous leverage does not amplify the equity return. The countercyclicality of the default rate in the model generates a credit risk premium, but does not amplify the overall credit spread. Producing reasonable asset pricing dynamics based on New Keynesian production-based models remains challenge.

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.