Three Essays in Empirical Macroeconomics

Abstract

This thesis comprises three self-contained chapters that each contributes new insights to this field of empirical macroeconomics.<br /> Chapter 1 examines the role of shocks to consumer misperceptions in explaining macroeconomic fluctuations. This chapter employs a Bayesian estimation of a New Keynesian model with imperfect information. Agents only observe aggregate productivity and a signal about its permanent component contaminated with noise. Shocks to the signal ("noise shocks'') trigger aggregate fluctuations unrelated to fundamental changes in productivity. Noise shocks explain up to 14 percent of output volatility and up to 25 percent of consumption fluctuations. Counterfactual experiments show that nominal rigidities and the specification of the monetary policy rule are crucial for the importance of noise shocks.<br /> In the backdrop of the European sovereign debt crisis, Chapter 2 investigates whether the co-movement of the fiscal balance and the current account depends on the indebtedness of the government. The first part of the analysis presents the estimation of a dynamic panel threshold model for 15 European countries to quantify the influence of sovereign indebtedness on the relationship between the fiscal balance and the current account. Below the estimated threshold of 72 percent government debt-to-GDP this chapter finds a significant, positive relationship between the fiscal balance and the current account, whereas above the threshold the partial correlation is insignificant with a point estimate around zero. The second part of the analysis provides a structural explanation for the empirical evidence based on a small open economy model allowing for the possibility of sovereign default. High government debt-to-GDP ratios raise non-linear sovereign default risk premia due to the increasing probability of government default and lead to a higher uncertainty about future taxes. Therefore, private saving increases while fiscal deficits are expanding, leading to a less pronounced current account deficit. The model-based correlation of the fiscal balance and the current account declines by 0.15 when moving from a low government debt regime to a high government debt regime, which is quantitatively in line with the empirical evidence. <br /> Chapter 3 identifies monetary policy shocks based on a new, extensive real-time forecast data set and estimates the effects of these shocks on the U.K. macroeconomy. In employing the Romer-Romer methodology a first stage regression purges the intended policy target rate of systematic policy changes to the policymakers' real-time information set. Based on the new policy shock series this chapter finds moderate effects of monetary policy on the macroeconomy: A 100 basis points increase in the policy rate reduces output by up to 0.6 per cent and inflation by up to 0.8 percentage points after two to three years. Despite controlling for commodity prizes, oil prizes, and exchange rates a conventional, recursive VAR with Bank Rate produces a persistent prize puzzle. The methodology employed in this chapter resolves the prize puzzle of the U.K. and shows that forecasts are crucial for this result.