Essays on Fiscal, Monetary, and Macroprudential Policy

Download or read book Essays on Fiscal, Monetary, and Macroprudential Policy written by Christopher Johnson and published by . This book was released on 2020 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: My dissertation investigates policy-oriented issues relating the the Great Recession from a macro-financial perspective. The first chapter focuses on macroprudential policy in the context of the Global Financial Crisis. The second chapter evaluates the effectiveness of fiscal stimulus in response to the Great Recession. The third chapter considers welfare-maximizing monetary policy when the liquidity of assets depends on the opinions of investors. A striking feature of the Great Recession was that all G7 countries experienced a simultaneous decline in economic activity. Two crucial developments prior to the crisis were the rise of non-bank financial intermediation, or shadow banking, and increased trade in asset-backed securities around the world. In the first chapter of my dissertation, I describe the extent to which shadow banking and securitization contributed to the high degree of international comovement during the Great Recession, which largely resulted from the collapse of the US housing bubble. In order to address this, I utilize a novel two-country real business cycle model with financial intermediation disaggregated between commercial and shadow banking in both countries, the latter of which specializes in securitization. When a negative country-specific shock occurs, both countries experience a simultaneous decline in both real and financial economic activity. The shock is transmitted across borders through a balance sheet channel, and is then amplified by the high leverage of shadow banks. On the policy front, I find that when capital controls are imposed on securities originated by the country where a negative shock occurs, both the transmission and amplification factors are reduced. In response to the Great Recession, fiscal stimulus was utilized with the American Recovery and Reinvestment Act (ARRA) of 2009. The effectiveness of fiscal stimulus has been well-documented through empirical estimates of fiscal multipliers. However, the validity of these measures came into question following the ARRA, with most criticisms regarding endogeneity. In 2011, Robert Barro wrote in the Wall Street Journal that the studies the Obama administration relied on were dependent upon models that ``substitute assumptions for identification.'' The assumptions in question are the recursive structures involving the endogenous variables utilized in these models, also known as a Cholesky ordering. In the second chapter of my dissertation, I test the validity of Cholesky ordering in the context of measuring fiscal multipliers. Using a novel iterative projection instrumental variable approach in a structural vector autoregressive framework, I find strong evidence in the rejection of every possible recursive ordering among standard endogenous variables utilized throughout the literature. I also find new estimates of fiscal multipliers that do not rely on a Cholesky ordering. My estimates are conservative relative to the rest of the literature, with fiscal multipliers that are economically and statistically significant after four quarters, but disintegrate within eight quarters. In the third chapter of my dissertation, I consider how differences of opinion among investors affect the liquidity value of assets. I use a monetary framework in which money and risky assets can facilitate trade. While the future value of money is agreed upon among investors, the risky asset is opinion-sensitive such that traders may disagree on its future value. This results in a pecking order theory of trade, which depends on the perceptions of the traders in question. I find that optimists prefer to use money instead of assets as a method of payment, whereas pessimists prefer to use assets instead of money. Intuitively, optimists value assets for their future return value, so they would rather hold onto their assets to realize those returns. Pessimists expect less favorable returns on their assets, so they are willing to part ways with them. Pessimists buys assets because there is always the possibility that they meet an optimist to trade with, by which the terms of trade will be favorable for pessimists. Regarding monetary policy, the Friedman rule is welfare-maximizing. Additionally, monetary policy can alter the composition of investors in the asset market. Specifically, lowering the nominal interest rate drives pessimists out of the asset market.