Essays on macroeconomics

Petar Dobromirov Dobrev

doi:10.17918/kb8t-bm65

This thesis consists of three chapters that explore different macroeconomic issues. In the first chapter, I introduce deep habit formation into an otherwise standard two-country sticky price model with local currency pricing and examine the model's ability to account for the dynamics of the real exchange rate present in the data. I show that if consumption is subject to deep habit formation, the model can match the volatility of the real exchange rate observed in the data, but falls short in generating enough persistence in line with the empirical evidence. In the second chapter, I use data from US Treasury auctions to collect information on the bid-to-cover ratio, a maturity specific proxy for the degree of excess demand in the market for US Treasury bonds. I show that the financial crisis of 2008-09 generated a significant increase in bid-to-cover for short and medium duration debt. Excess demand from private investors has thus likely imposed considerable downward pressure on these yields separate from monetary policy. Further, the notably larger observed increase in bid-to-cover for short-term debt may have contributed to short-term rates hitting the zero lower bound and point to the existence of a convenience yield within the market for US Treasuries. In addition, I find that the US Treasury issued more bonds with medium duration (2,3 and 5 years) in response to the Federal Reserve's first and third quantitative easing programs. Thus, the US Treasury may have reduced the effectiveness of these unconventional policies in lowering yields for medium duration bonds. In the third chapter (joint with Marco Airaudo), we show that the asset market segmentation model built by Chen et al. (2012) to study the effects of quantitative easing contains a unit root. The unit root introduces error in the model's linear approximation, its convergence dynamics and its determinacy properties casting uncertainty on its usefulness for policy analysis. We eliminate the unit root by assuming that agents derive utility services from government bonds. When we simulate the model, we show that it is broadly consistent with conventional theory on the transmission mechanism of quantitative easing. However, our mechanism also highlights a new channel: a negative wealth effect which may counteract some of the stimulus induced by the central bank's purchases of long-term debt.

Essays on macroeconomics

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Essays on macroeconomics

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