Four essays in dynamic macroeconomics
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The dissertation contains essays concerning the linkages between macroeconomy and financial market or the conduct of monetary policy via DSGE modelling. The dissertation contributes to the questions of fitting macroeconomic models to the data, and so contributes to our understanding of the driving forces of fluctuations in macroeconomic and financial variables. Chapter one offers an introduction to my thesis and outlines in detail the main results and methodologies. In Chapter two I introduce a statistical measure for model evaluation and selection based on the full information of sample second moments in data. A model is said to outperform its counterpart if it produces closer similarity in simulated data variance-covariance matrix when compared with the actual data. The "distance method" is generally feasible and simple to conduct. A flexible price two-sector open economy model is studied to match the observed puzzles of international finance data. The statistical distance approach favours a model with dominant role played by the expectational errors in foreign exchange market which breaks the international interest rate parity. Chapter three applies the distance approach to a New Keynesian model augmented with habit formation and backward-looking component of pricing behaviour. A macro-finance model of yield curve is developed to showcase the dynamics of implied forward yields. This exercise, with the distance approach, reiterate the inability of macro model in explaining yield curve dynamics. The method also reveals remarkable interconnection between real quantity and bond yield slope. In Chapter four I study a general equilibrium business cycle model with sticky prices and labour market rigidities. With costly matching on labour market, output responds in a hump-shaped and persistent manner to monetary shocks and the resulting Phillips curve seems to radically change the scope for monetary policy because (i) there are speed limit effects for policy and (ii) there is a cost channel for monetary policy. Labour reforms such as in mid-1980s UK can trigger more effective monetary policy. Research on monetary policy shall pay greater attention to output when labour market adjustments are persistent. Chapter five analyzes the link between money and financial spread, which is oft missed in specification of monetary policy making analysis. When liquidity provision by banks dominates the demand for money from the real economy, money may contain information of future output and inflation due to its impact on financial spreads. I use a sign-restriction Bayesian VAR estimation to separate the liquidity provision impact from money market equilibrium. The decomposition exercise shows supply shocks dominate the money-price nexus in the short to medium term. It also uncovers distinctive policy stance of two central banks. Finally Chapter six concludes, providing a brief summary of the research work as well as a discussion of potential limitations and possible directions for future research.
Thesis, PhD Doctor of Philosophy
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