Dissertations / Theses on the topic 'E Macroeconomics and monetary economics'

Chapter 1.—This chapter addresses model specification uncertainty using the Bayesian Generalized Method of Moments (GMM). Employing Canadian data, I estimate 64 hybrid New Keynesian models which differ in their lag specification, and use a modified GMM quadratic function to produce model posteriors. I compute optimal discretionary policies for each model and then derive a posterior-weighted policy and loss. My results show that i) policy should respond more to the output gap than inflation, ii) a more aggressive policy is prescribed for the period of stagflation in the 1970s and early 1980s and iii) a relatively light-touch policy is recommended during the Great Moderation, and produces better outcomes. This last result supports the hypothesis of ‘good luck’ over ‘good policy’. Chapter 2.—In this chapter I develop an inverse control procedure to recover the under- lying preferences of a monetary authority engaged in discretionary policymaking. I adjoin the first-order condition (FOC) of the optimal interest rate rule-setting derived under discretion to the usual least squares moment conditions during the GMM procedure. Using Monte Carlo simulations, I show that the preferences on output gap stabilization and interest rate smoothing may be recovered. Robustness reveals that recovering the preference on the output gap is dependent upon policy actions having sufficient effect on the macroeconomy. Further testing indicates that the procedure functions for alternative starting values, may be adapted to different lag specifications of the underlying model, and is able to recover different sets of policy preferences. Chapter 3.—This chapter tests the hypothesis that the monetary authorities of Canada, the United States and the United Kingdom have exhibited similar preferences over stabilizing the output gap and smoothing the interest rate, by way of an inverse control algorithm (FOC- based GMM) for a discretionary policymaker. For the sample period covering 1968:1-2006:4, the FOC-based provides comparable structural estimates to a benchmark specification using an instrument-based GMM. The data suggest no role for output stabilization in any country, but a large and significant concern for interest rate smoothing is observed in Canada. Measures of fit reject optimality in the United States for baseline specification sample, but do not preclude it in any country when sample periods are restricted to the current man- dates. Policymakers’ reaction functions are shown to be sensitive to the underlying policy preferences, though decreasingly so at high levels of interest rate smoothing. Robustness is seen with respect to starting values and fixed policy coefficients.

This thesis consists of three essays in monetary economics and international macroeconomics.
Chapter one uses Canadian data to evaluate the performance of money growth targeting and inflation targeting policy rules, especially when they react to asset price changes. There are three important findings. First, estimates of the policy rules consistent with both regimes provide evidence that the Bank of Canada has systematically reacted to stock price bubbles and exchange rate changes. Second, a counterfactual experiment reveals that, the high inflation of the 1970s and early 1980s could have been avoided if the Bank of Canada had responded more strongly to inflation and growth in aggregate demand. Third, simulation experiments yielded two important results: For both the money growth targeting and inflation targeting policy rules, it is always desirable to react to changes in exchange rates and stock price bubbles: Contrary to established findings, the results indicate that the money growth targeting policy rules are more efficient than the inflation targeting policy rules.
Chapter two uses data on Ghana to test the validity of the intertemporal model of current account that allows for external shocks in the form of variable interest rates and exchange rates, and the existence of capital controls. We find that, irrespective of the degree of capital control, the basic model fails to predict the dynamics of the actual current account. However, we find that extending the model to capture variations in interest rates and exchange rates better explains the path of the actual current account balances only during the liberalized regime. When the model was adjusted to allow for credit constraints, there was some support for the proposition that the presence of capital controls prevented economic agents in Ghana to smooth their consumption path during the control regime.
Chapter three investigates the effect of trading block on Tanzania's bilateral trade. Using a fixed effects estimation technique, the results revealed that the East African Community (EAC) and the European Union (EU) have had significant positive effects on Tanzania's bilateral trade. We also find that there is a significant intra-trade relationship between Tanzania and its major trading partners in the manufacturing sector.

This thesis consists three chapters on topics in monetary economics and applied macroeconomics. In the first chapter, I consider a framework where the central bank has private information about future economic conditions. Agents update their beliefs according to Bayes’ theorem. Policy actions play a signaling role, and may therefore have an impact on both short and long-term interest rates. I discuss the implications of information frictions for the design of optimal simple rule. In the second chapter, I explore the role of market power for the optimal choice of infla-tion index for a central bank to stabilize In a framework with cross-sector heterogeneities in both nominal rigidity and market power. The optimal weight attached to inflation in a sector is increasing in this sector’s: i)price stickiness (stickiness channel) and ii) degree of market competition (competition channel). Moreover, if firms in a more competitive sector adjust their price more frequently as predicted by costly price adjustment models, the competition channel offsets the stickiness channel. In the third chapter, I show that for short horizon exchange rate predictability, the simple random walk model outperforms professional forecasts. A new puzzle arises: why do professional forecasters not adopt the simple random walk model to provide a more accurate estimate? I provide an explanation based on ambiguity averse forecasters.
Aquesta tesi està compresa per tres capítols que tracten temes en economia monetària i macroeconomia aplicada. En el primer capítol considero un marc teòric en el qual el banc central té informació privada respecte les condicions econòmiques futures. Els agents econòmics actualitzen les seves creences en base al teorema de Bayes. Les accions del banc tenen un paper senyalador, i poden tenir un impacte en els tipus d’interès a curt i llarg termini. En aquest marc, discuteixo el paper de les friccions de la informació a l’hora de dissenyar una regla monetària simple. En el segon capitol exploro el paper del poder de mercat en l’elecció òptima de l’índex de preus a ser estabilitzat. En aquest cas considero un marc teòric en el qual les rigideses nominals i el poder de mercat difereixen entre sectors. El pes òptim assignat a la inflació d’un sector és creixent en la rigidesa dels preus (efecte rigidesa) i en el nivell de competició (efecte competició) d’aquest sector. Si les empreses en un sector competitiu ajusten els preus més freqüentment, tal com prediuen els models que consideren un ajust de preus costós, l’efecte competició contrarestarà` l’efecte rigidesa. Finalment, en el tercer capítol , demostro que per a predir els tipus de canvi a curt termini, un simple model random walk supera les prediccions professionals. D’aquesta observació sorgeix una nova incògnita: per què els professionals no adopten un model random walk per oferir unes prediccions mées encertades? En aquest capítol mostro com tal incògnita es pot explicar en base a l’aversió a l’ambigïitat dels professionals.

Thesis advisor: Susanto Basu
Thesis advisor: Ryan Chahrour
This dissertation consists of three independent chapters analyzing the sources of business cycles and the role of monetary policy. Taking both closed- and open-economy perspectives, I study the importance of expectations for the empirical identification of economic and policy shocks, the nature of business cycle fluctuations, and the optimal conduct of monetary policy. The first chapter is titled ``International Spillovers and the Exchange Rate Channel of Monetary Policy,'' and is joint work with Vito Cormun. Motivated by the observation that exchange rate fluctuations largely influence small open economies, we propose a novel approach to separately identify the effects of domestic and external shocks on exchange rates and other macroeconomic variables, thereby uncovering a set of new empirical findings. A first finding is that external shocks account for most of exchange rate fluctuations. Relatedly, the bulk of external shocks is strongly correlated with measures of global risk aversion and uncertainty (e.g. the VIX), and a country’s net foreign asset position largely explains the exposure of its exchange rate to external disturbances. A second finding is that domestic and external disturbances generate very different comovement patterns between interest rates and exchange rates. In particular, unlike domestic shocks, external shocks are associated with large and significant deviations from uncovered interest parity. As a result, an econometrician that fails to properly distinguish between sources of exchange rate fluctuations is bound to obtain puzzling estimates of the exchange rate effects of domestic monetary policy shocks. These empirical findings have profound implications for models of small open economy and exchange rate determination. In particular, they favor theories in which exchange rates are jointly determined by the risk-bearing capacity in financial markets as well as the extent of a country’s financial imbalances. For this reason, we develop a model of the international financial sector that satisfies these features, and embed it in an otherwise standard general equilibrium two-country small open economy model. The key mechanism of the model consists of risk averse traders in the foreign exchange markets that require a premium to hold the currency risk of the small open economy. We show that the proposed model is able to reproduce all the empirical findings documented in the empirical analysis, including the cross-country differences in exposure to external shocks, the role of a country’s net foreign asset position, the different responses of interest rates, exchange rates, and currency excess returns across different shocks, as well as the emergence and resolution of the so-called exchange rate response puzzle across different identification approaches. The second chapter is titled ``Should Central Banks Target Investment Prices?'' and is joint work with Susanto Basu. The question posed in the title is motivated by the observation that central banks nearly always state explicit or implicit inflation targets in terms of consumer price inflation. To address the question, we develop an otherwise standard dynamic general equilibrium model with two production sectors. One sector produces consumption goods, while the other produces investment goods. In this context, we show that if there are nominal rigidities in the pricing of both consumption and investment goods and if the shocks to the two sectors are not identical, then monetary policy faces a tradeoff between targeting consumption price inflation and investment price inflation. In a model calibrated to replicate the estimated processes of sectoral total factor productivities as well as a set of unconditional business cycle moments, ignoring investment prices typically leads to substantial welfare losses because the intertemporal elasticity of substitution in investment is much higher than in consumption. Based on the model's predictions, we argue that a shift in monetary policy to targeting a weighted average of consumer and investment price inflation may produce significant welfare gains, although this would constitute a major change in current central banking practice. The third chapter is titled ``Information Acquisition and Self-Fulfilling Business Cycles,'' and is sole-authored work. To study the implications of imperfect information on economic fluctuations, I develop an otherwise standard Real Business Cycle model with endogenous information acquisition, which generates countecyclical firm-level uncertainty and endogenously procyclical productivity, as empirically documented in the literature. The main contribution of this chapter is the observation that this model displays aggregate increasing returns to scale and, potentially, an indeterminate dynamic equilibrium. In fact, an aggregate representation of the model is observationally equivalent to earlier theories of endogenous fluctuations based on increasing returns to scale, but its microeconomic foundations are consistent with empirically observed firm-level returns to scale. In a model calibrated to replicate a set of moments of the empirical distribution of firm-level productivity, self-fulfilling fluctuations are possible. In addition, a Bayesian estimation of the model suggests that non-fundamental shocks explain a significant fraction of aggregate fluctuations
Thesis (PhD) — Boston College, 2019
Submitted to: Boston College. Graduate School of Arts and Sciences
Discipline: Economics

This dissertation investigates whether criticisms of standard economic models can be addressed with only minimal modifications to the assumptions. In the first essay, the Real Business Cycle (RBC) model is studied, though it is well known that it cannot match the data on money. My solution is to retain the RBC framework but add money as a sunspot variable. This leaves all the main elements of the RBC model intact and successfully replicates many features of the monetary data. The second essay examines rational choice, the foundation of economics. Laboratory experiments have exposed small violations of the theory. I introduce preference discovery costs as a way to accommodate minor violations of revealed preference while retaining rationality and optimization. An experiment tested my idea. For several subjects, my model explained their behavior while standard theory could not. However, there were many other subjects whose behavior was incompatible with both theories. The last essay is about the equity premium puzzle. The standard framework in macroeconomics predicts that the equity premium will be quite small, but this prediction is off by an order of magnitude. However, I demonstrate that the problem can be resolved if there is no market for insurance against idiosyncratic income shocks. Though it is very realistic to relax the complete markets assumption and this suffices to solve the puzzle, it is debatable if this modification is truly minimal, given the prevalence of models that rely on market completeness.
10000-01-01

Esta Tese é composta por dois ensaios sobre Política Monetária. O primeiro ensaio trata da demanda por recursos intradiários e over. Com base no comportamento intradiário, são realizadas simulações para estimar a distribuição do saldo em reservas bancárias ao final do dia. A hipótese principal é de que o saldo em reservas ao longo do dia é um Processo de Levy composto por três componentes: um movimento browniano, um processo de Poisson composto com intensidade negativa e outro com intensidade positiva. Para determinar os parâmetros das simulações foram consideradas as situações em que processo é apenas um movimento browniano, ou apenas um processo de Poisson composto, ou ambos. Os parâmetros foram estimados pelos métodos convencionais e pelo modelo Tweedie, sendo feitas algumas ressalvas com relação às correlações entre defasagens. Além dos procedimentos de simulação tradicionais, foi utilizado o Bootstrap e sugerida uma forma alternativa. O modelo que apresentou melhor desempenho foi o que considera que o processo é um processo de Poisson composto. O segundo ensaio tem como tema a taxa natural de juros. Foram implementados três modelos e duas formas de estimá-los (Filtro de Kalman e estimação bayesiana). O modelo com melhor desempenho foi o modelo sugerido em Kirker (2008) estimado por procedimentos bayesianos. Como resultado, a taxa natural de juros está menor do que a taxa de juros real de curto prazo desde junho de 2009, o que sugere uma política monetária contracionista
This Thesis is composed of two essays on Monetary Policy. The first is about intraday and over reserve balances demand. Based on reserves intraday behavior, simulations are made to estimate reseve balances distribution at the end of the day. The main hypothesis is that reserve balaces along the day are Levy processes, with three components: a Brownian motion and two compound Poisson processes, one with negative and the other with a positive intensity. To determine simulation parameters, the process was alternatively considered a brownian motion, a compound Poisson process, or both. The parameters were estimeted by conventional methods and by the Tweedie model, when there is no autocorrelation. After these procedures of traditional simulation, a Bootstrap was used and an alternative procedure was proposed. The model with the best performance is the compound Poisson Process. The second essay is about natural interest rate. Three models are implementated and estimated by two methods (Kalman Filter e bayesian estimation). The best performance was obtained by the model based on Kirker (2008) and estimated through Kalman Filter. As a result, the natural interest rate was found to be above short run real interest rate since June 2009, sugesting expansionary Monetary Policy.

Thesis (Ph. D.)--University of Oregon, 2002.
Typescript. Includes vita and abstract. Includes bibliographical references (leaves 161-169). Also available for download via the World Wide Web; free to University of Oregon users.

Thesis advisor: Susanto Basu
This dissertation consists of three essays that study macroeconomic modeling and its application with a particular focus on monetary economics. In Chapter 1, I develop a New Keynesian model with heterogeneous workers whose wage settings are subject to downward nominal wage rigidity (DNWR) to address two puzzles of inflation dynamics: the missing deflation during the Great Recession and the excessive disinflation afterward. I demonstrate that DNWR introduces a time-varying wedge between the output gap and the marginal cost of producing one unit of output, which makes the observed Phillips curve flatter during recessions. Endogenous evolution of cross-sectional wage distribution generates various dimensions of non-linearities, while the presence of the zero lower bound (ZLB) of the nominal interest rate further reinforces the mechanism. Consequently, the model can quantitatively account for the inflation dynamics during and after the Great Recession under plausible parameter values that are consistent with micro evidence. In Chapter 2, I study welfare-maximizing monetary policy rule in the heterogeneous agent New Keynesian model with DNWR that is developed in Chapter 1. The optimal monetary policy rule responds strongly to output to address the inefficiency generated by DNWR, while responsiveness to inflation plays a minor role in welfare. Moreover, monetary policy can improve social welfare by responding more aggressively to a contractionary shock than to an expansionary one to offset the asymmetry stemming from DNWR. In the presence of the ZLB, on the other hand, alternative policy rules such as forward guidance and price-level targeting can partly offset the adverse effects of it by committing to a future low interest rate policy. I also investigate the optimal steady-state inflation rate. In Chapter 3, which is coauthored with Dongho Song and Jenny Tang, we propose a method of introducing theory-driven priors into the estimation of the vector autoregression (VAR). Our methodology is more flexible than existing methods in that it allows a researcher to incorporate prior beliefs on a subset of variables in theoretical models that are of key interest while remaining agnostic about other variables in the VAR. We apply to the problem of exchange rate forecasting for the British pound versus the US dollar. By imposing different combinations of priors informed by uncovered interest rate or purchasing power parity, we find that substantial gains are realized at longer forecast horizons
Thesis (PhD) — Boston College, 2018
Submitted to: Boston College. Graduate School of Arts and Sciences
Discipline: Economics

Thesis advisor: Fabio Ghironi
My dissertation develops a set of tools for introducing heterogeneity into economic models in an analytically tractable way. Many models use the representative agent framework, which greatly simplifies macroeconomic aggregation but abstracts from the heterogeneity we see in the real world. In my research, I move away from the representative agent framework in two key ways. First, my work in international macroeconomics incorporates heterogeneity via idiosyncratic shocks across countries. Second, my work on financial frictions employs asymmetric information between lenders and borrowers. In both of these areas, my goal is to examine the implications of heterogeneity in the most tractable way possible. Crucially, these insights can be incorporated into the models currently used by academics and central banks for policy analysis. The first chapter of my dissertation, "Price Stability in Small Open Economies," joint work with Mikhail Dmitriev, studies the conduct of optimal monetary policy in a continuum of small open economies. We obtain a novel closed-form solution that does not restrict the elasticity of substitution between home and foreign goods to one. Using this global closed-form solution, we give an exact characterization of optimal monetary policy and welfare with and without international policy cooperation. We consider the cases of internationally complete asset markets and financial autarky, producer currency pricing and local currency pricing. Under producer currency pricing, it is always optimal to mimic the flexible-price equilibrium through a policy of price stability. Under local currency pricing, policy should fix the exchange rate. Even though countries have monopoly power, the continuum of small open economies implies that policymakers cannot affect world income. This inability to influence world income removes the incentive to deviate from price stability under producer currency pricing or a fixed exchange rate under local currency pricing, and prevents gains from international monetary cooperation in all cases examined. Our results contrast with those for large open economies, where interactions between home policy and world income drive optimal policy away from price stability or fixed exchange rates, and gains from cooperation are present. The second chapter of my dissertation, "The Optimal Design of a Fiscal Union'', joint work with Mikhail Dmitriev, examines the role of fiscal policy cooperation and financial market integration in an open economy setting, motivated by the recent crisis in the euro area. I show that the optimal design of a fiscal union is governed by the degree of substitutability between the export goods of different countries. When countries produce goods that are imperfect substitutes they should harmonize their income taxes to prevent large terms of trade externalities. On the other hand, when countries produce goods that are close substitutes, they should organize a contingent fiscal transfer scheme to insure against idiosyncratic shocks. The welfare gains from the optimal fiscal union are as high as 5\% of permanent consumption when countries are able to trade safe government bonds, and approach 20\% of permanent consumption when countries lose access to international financial markets. These gains are especially large for countries like Greece that produce highly substitutable export goods and who cannot raise funds on international financial markets to insure against downside risk. The results illustrate why federal currency unions such as the U.S., Canada and Australia, with income tax harmonization and built-in fiscal transfer arrangements, withstand asymmetric shocks across regions much better than the euro area, which lacks these ingredients at the moment. The third chapter of my dissertation, joint work with Mikhail Dmitriev, studies macro-financial linkages and the impact of financial frictions on real economic activity in some of my other work. Beginning with the Bernanke-Gertler-Gilchrist (1999) financial accelerator model, a large literature has shown that financial frictions amplify business cycles. Using this framework, Christiano, Motto and Rostagno (AER, 2013) show that shocks to financial frictions can explain business cycle fluctuations quite well. However, this literature relies on two ad hoc assumptions. When these assumptions are relaxed and agents have access to a broader set of lending contracts, the financial accelerator disappears, and shocks to financial frictions have little to no impact on the economy. In addition, under the ad hoc lending contract inflation targeting eliminates the financial accelerator. These results provide guidance for monetary policymakers and present a puzzle for macroeconomic theory
Thesis (PhD) — Boston College, 2014
Submitted to: Boston College. Graduate School of Arts and Sciences
Discipline: Economics

xii, 114 p. : ill.
The banking sector has been extensively analyzed in economics. On the microeconomic side, research has advanced our understanding of banks and the inverse relationship between market power and bank production. The macroeconomic side of research has focused on the transmission of monetary policy, and it is understood that the financial system, including banks, plays an integral role in transmitting monetary policy decisions to economic variables such as investment, consumption, and GDP. There is limited understanding, however, about how market power and bank concentration affects the transmission of monetary policy. The main focus of this dissertation is to address this gap in the literature and is achieved by three contributions. First, I develop a theory of banking behavior that accounts for competition and monetary policy. I empirically test the theory and show that banking concentration dampens the impact of monetary policy on lending activity in the short-run. My second contribution involves building a theoretical model with these short-run lending effects incorporated into an endogenous growth model that allows agents, banks, and the central bank to interact. This model shows how short-run lending is tied to growth. Again, monetary policy is less effective in markets with higher concentration. The last contribution is made by empirically testing the second contribution. The empirical findings are consistent with both the first and second contributions; banking markets with less competition adversely affect growth and also diminish the long-run impact of monetary policy.
Committee in charge: Dr. Mark Thoma, Co-Chair; Dr. Wesley Wilson, Co-Chair; Dr. Shankha Chakraborty, Member; Dr. Larry Dann, Outside Member

Thesis advisor: Fabio Schiantarelli
In the wake of the financial crisis of 2007-2009, academics and policymakers have worked to empirically quantify macro-financial linkages. This dissertation contributes to this debate by covering two broad themes. First, substantial changes in bank regulation and supervision typically follow financial crises. Quantifying the impact of these new policies is of paramount importance to academics and policymakers. To this end, my research in this area sheds light on the ways in which changes in financial stability policy ultimately affect the economy. Bank stress testing has become a major tool of supervisory policy in the past decade. The first chapter, The Real Effects of Stress Testing, uses the introduction of annual stress testing of large U.S. banks in 2009 as a quasi-experiment to examine whether bank supervisory policies affect real economic activity. While stress-tested banks reduced their risk exposure to large corporate loans, foreign banks mostly offset this shock and enabled firms to continue borrowing after the test. However, speculative grade firms that were highly exposed to stress-tested banks borrowed on worse terms after the test, and subsequently reduced fixed investment and employment. In contrast, highly exposed investment grade firms received new loans and expanded intangible investment. This paper provides insights into the effects of stress testing on the reallocation of risks in the financial system and the consequences for real economic activity. The structure of the U.S. mortgage market has experienced dramatic changes in recent years, as Fannie Mae and Freddie Mac (the major government-sponsored enterprises or GSEs) faced substantial reforms to their business practices. An important feature of regulatory reform included changing the pricing of loan guarantees on mortgage-backed securities insured by the GSEs, in particular removing the subsidy paid by small lenders to large lenders in 2012. The second chapter of this dissertation, Lender Cross-Subsidization and Credit Supply in the Fannie Mae MBS Market (co-authored with Igor Karagodsky), shows that the removal of this subsidy resulted in a relative increase in mortgage lending by small lenders. However, states with relatively higher concentrations of large lenders experienced relative reductions in credit following the removal of these subsidies. This research underscores an important link between lender market power and credit supply. Understanding the drivers of the fluctuations in bond returns is a central question in finance. Theoretically, unexpected bond returns should reflect either changes in expectations of future short-term rates or future compensation for risk. The third chapter of this dissertation, Survey Forecasts and Bond Return Decompositions, revisits this question using survey forecasts of professional economists to measure expectations of interest rates and returns, rather than with a statistical model. Two main results emerged from this analysis: (1) News about future short-term interest rates explains relatively more of the variation in unexpected excess bond returns for short-maturity bonds relative to long-maturity bonds. (2) The share of news explained by future short-term interest rates increases with horizon for all maturities. This analysis contributes to the recent academic literature that highlights the importance of subjective expectations in understanding asset-price movements
Thesis (PhD) — Boston College, 2019
Submitted to: Boston College. Graduate School of Arts and Sciences
Discipline: Economics

Economics
Ph.D.
This thesis asks the question, is there economic justification for two CARICOM countries forming a currency union? There is a theoretical component consisting of a dynamic stochastic general equilibrium (DSGE) model, and an empirical component utilizing vector autoregressions and cointegration analyses. More specifically, the reactions of two, small, open economies, to symmetric and asymmetric shocks, with and without a currency union, are investigated. Secondly, the demand and supply shocks between country pairs are examined to determine whether positive correlations exist. Thirdly, the thesis looks at the issue of economic convergence, especially given the coordinated efforts of CARICOM member states towards an environment conducive for a currency union. The theoretical results support the traditional view that countries with symmetric shocks are better candidates for a currency union, while those with asymmetric shocks are not. The empirical work supports the formation of currency unions for the following country pairs, Grenada-St. Kitts, Grenada-St. Vincent, Trinidad-Grenada, and Trinidad-St. Vincent.
Temple University--Theses

The first essay introduces a Bayesian logistic smooth transition vector autoregression (LSTVAR) approach to investigating the impact of international business cycles on the UK economy. We find that the British business cycle is asymmetrically influenced by growth in the US, France and Germany. Overall, positive and negative shocks generating in the US or France affect the UK in the same directions as the shock. However, a shock emanating from Germany always exerts negative cumulative effects on the UK. Further, a positive shock arising from Germany adversely affects the UK output growth more than a negative shock of the same size. The second essay proposes a Bayesian method to investigating the purchasing power parity (PPP) utilizing an exponential smooth transition vector error correction model (ESTVECM). Employing a simple Gibbs sampler, we jointly estimate the cointegrating relationship along with the nonlinearities caused by the departures from the long run equilibrium. By allowing for symmetric regime changes, we provide strong evidence that PPP holds between the US and each of the remaining G7 countries. The model we employed implies that the dynamics of the PPP deviations can be rather complex, which is attested to by the impulse response analysis. The final essay proposes a Bayesian approach to exploring money-output causality within a logistic smooth transition vector error correction framework (LSTVECM). Our empirical results provide substantial evidence that the postwar US money-output relationship is nonlinear, with regime changes mainly governed by the lagged inflation rates. More importantly, we obtain strong support for long-run non-causality and nonlinear Granger-causality from money to output. Furthermore, our impulse response analysis reveals that a shock to money appears to have a negative aggregate impact on real output over the next fifty years, which calls for more caution when using money as a policy instrument.

The thesis consists of three chapters: Chapter 2 investigates, in the context of a two-country model with monopolistic competition and price stickiness, the implications for macroeconomic stability and the welfare properties of three distinct kinds of monetary policy arrangements: (a)cooperative, (b) noncooperative and (c) monetary union. The cooperative first best can be achieved if domestic inflation is set equal to zero in both countries at all times. In the non cooperative equilibrium welfare is not maximized due to the presence of beggar-thy-neighbor policies with the costs of non-cooperation increasing with the degree of openness of the economy. A monetary unión is welfare-improving relative to non cooperation only for countries that have strong trading links. In chapter 3 (co-authored with Katharine Neiss), we investigate the propagation mechanism of monetary shocks in an otherwise standard sticky price model, modified to incorporate factor hoarding in the form of variable capital utilisation rates and labour effort. In contrast, to previous studies, we find that real effects of monetary shocks can be generated at relatively low degrees of nominal rigidities. Factor hoarding enriches the propagation mechanism, by flattening the marginal cost responses to monetary shocks. The assumption of labour hoarding is crucial for generating persistence, while the assumption of variable capital utihsation allows us to generate reahstic investment volatility without having to introduce capital adjustment costs. Finally, Chapter 4 investigates whether monetary pohcy in a currency area should stabilize an aggregate of inflation and output or whether it should take into account the dispersion of these variables across regions when the currency area is characterized by asymmetric shocks across regions and when participation constraints define the set of feasible policies. We find that even if the two regions are identical, asymmetric shocks might create asymmetric responses of regional variables. Participation constraints introduce a trade-oíf between eíficiency and incentives in settings with lack of a strong enforcement technology. In order to deal with incentive problems the central bank has to manipulate the future consunption paths by adopting a more expansionary policy with respect to regional productivity shocks.

Este trabalho procura avaliar a importância de fricções financeiras para a economia brasileira através da estimação de um modelo Dinâmico e Estocástico de Equilíbrio Geral que incorpora um setor bancário e de crédito para a economia brasileira. São feitas análises dos choques estruturais introduzidos no modelo especificado, permitindo saber a influência de cada variável nas flutuações do produto da economia brasileira, bem como o papel desempenhado pelo setor bancário nos ciclos. Desse modo conseguimos concluir que a redução das fricções a empréstimos para empreendedores teria um impacto positivo no aumento do investimento, consumo e produto. E que as fricções financeiras por um lado permitem a manutenção de spreads bancários elevados, impactando positivamente nos lucros dos bancos, mas por outro ajudam a conter os níveis de preços face a choques na economia brasileira.
This study tries to evaluates the importance of financial frictions for the Brazilian economy through the estimation of a Dynamic and Stochastic General Equilibrium model which incorporates a banking and credit sectors. We study the influence of different structural shocks on several variables of the Brazilian economy, as well as the role of the banking sector in the business cycles. In this regard, we conclude that the reduction of financial frictions for loans to the entrepreneurs would have a positive impact on investment, consumption and output of the Brazilian economy. And if, in one hand, financial frictions allow the maintenance of higher banking spreads, increasing banks\' profits, on the other hand, it helps in the contention of inflation when the Brazilian economy respond to different shocks.

This dissertation spans topics related to global trade, oil prices, optimum currency areas, the eurozone, monetary independence, capital controls and the international monetary policy trilemma. It consists of four chapters and three essays. Chapter one provides a brief summary of all three essays. Chapter two investigates the impact of oil prices on global trade. It is concluded that when oil prices increase, countries start trading relatively more with their neighbors. As an application this chapter provides a new estimate of the eurozone effect on trade. Chapter three continues to study the eurozone and asks whether it is an optimum currency area using the member countries’ desired monetary policies. It is concluded that Greece, Spain, and Ireland have desired policies that are the least compatible with the common euro policy and are therefore the least likely to have formed an optimum currency area with the euro. Chapter four provides a new methodology in testing the international trilemma hypothesis. It is concluded that the trilemma holds in the context of the Asian countries.

Dans cette thèse, l'objectif de mes recherches, s'inscrivant dans la lignée de la littérature qui donne un rôle prééminent aux intermédiaires financiers dans les modèles macroéconomiques,consiste à comprendre les mécanismes qui ont permis à l'intermédiation financière imparfaite et parfaite d'affecter la dynamique de l'économie et la transmission de la politique monétaire, et de fournir une nouvelle formulation théorique pour l'évaluation de la politique monétaire non conventionnelle. Pour ce faire, j'ai d'abord considéré l'impact de l'intermédiation financière sur l'analyse des effets de la transparence de la banque centrale (chapitre 2). Dans le chapitre 3, je me suis concentré sur le rôle joué par l'intermédiation financière imparfaite et les frictions financières dans la transmission des chocs : par quels mécanismes, la présence d'intermédiaires financiers contraints par leur bilan affecte l'effet des chocs sur la macroéconomie? Enfin, dans le quatrième chapitre, je construis un modèle théorique pour analyser une question importante : le mécanisme de transmission des effets de l'achat à grande échelle de la banque centrale de titres adossés, qui n'a pas été effectué dans la littérature existante
In this dissertation, my research aims at dwelling on the questions, at understanding and explaining -- as a follow of current strand of literature on financial frictions -- the mechanisms that allowed the imperfect and perfect credit intermediation to affect the dynamics of economy and the transmission of monetary policy, and providing a new theoretical formulation for evaluating the unconventional monetary policy. To do this, I first considered the impact of financial intermediation on the analysis of central bank transparency issue (Chapter 2). ln Chapter 3, I focused on the role played by the imperfect financial intermediation/financial frictions in the transmission of shocks : through which mechanisms, do the presence of balance-sheet constraint financial intermediaries affect the effect of shocks on the macroeconomy? Finally, in Chapter 4, 1 construct an theoreticalmodel to analyze an important issue which have net been carried out in existing literature: the transmission mechanism of the central bank's large-scale purchase of mortgage-backed securities. ln this chapter, I first simulated a financial crisis to see if the model is able to replicate some of the most important stylized facts of the Great Recession. Then, basing on the simulated crisis, I examine the efficacy and transmission mechanism of large scale purchases of MBS through comparing these purchases to the purchases of corporate bonds. This experiment is conducted in two credit market configurations, i.e., a partially and a totally segmented credit market. The latter case of market condition is considered by many economists as main obstacle that impedes the nominal functioning of the financial markets. ln this work, we have obtained rich and important findings for guiding the use of unconventional monetary policy. The following parts briefly present the findinqs of the thesis

Climate change is a major concern impacting every aspect of life including economics. Therefore, it seems interesting to discuss the role of monetary policy in global warming mitigation. Previous papers hint that monetary policy, especially the European Central Bank’s quantitative easing, may have a bad impact on the environment. Here we will check this statement using two simple linear regressions to see if quantitative easing has an impact on carbon emissions and firm’s willingness to pollute, in the Eurozone. We find that quantitative ease has no or very small effect on these environmental features. Finally, we will give an overview of the discussion around how quantitative easing and central banks’ actions can actively reduce climate change.

In January 2013, the Japanese Government under Prime Minister Shinzo Abe and the Bank of Japan launched a package of monetary and fiscal stimulus along with promises of structural economic reform called Abenomics. This paper examines the preliminary effects of the Bank of Japan’s Quantitative and Qualitative Monetary Easing (QQE), which forms the monetary component of Abenomics. Given the weak economic response to QQE so far, the study predicts that QQE has failed to make a significant impact on its target macroeconomic variables of inflation and output. The results confirm this hypothesis as increases in the monetary base have an insignificant effect on the Consumer Price Index and have little effect in changing the trajectory of output. The results of QQE so far mirror those of the Federal Reserve’s quantitative easing programs, during which expansion of the monetary base in the aftermath of the 2008 financial crisis failed to significantly raise output given the size of the stimulus. Abenomics, however, continues to be implemented, making the results presented in this paper inconclusive.

ABSTRACT In this thesis, I evaluate how fiscal and monetary stimulus policies contribute to the economic recovery process of recessions in the United States. Using a case study approach, I will study ten major recessions over the 20th century and early 21st century to answer this question. I will study the different fiscal and monetary policies implemented during the following recessions: the Great Depression; the Recession of 1937, the Recession of 1945, the Recession of 1953, the 1973-75 Recession, the 1980 Recession, the Early 1980s Recession, the Early 1990s Recession, the Early 2000s Recession, and the Late-2000s Recession. The literature suggests a wide range of conflicting viewpoints as to the most effective stimulus policies for economic recovery. I conclude that while both monetary and fiscal stimulus policies have been effective in contributing to GDP growth and reductions in unemployment, it is evident that each recession requires a unique policy response. In many cases, I find value in implementing both monetary and fiscal policy, jointly, as they complement one another. I also find that, generally, monetary policy is most effective in contributing to the economic recovery process of recessions through open market operations that reduce the interest rate and that fiscal policy is most effective in contributing to the economic recovery process of recessions through government spending. My systematic exploration of these policies and the recession case studies, provide valuable information of the effects of these policies and provide insight into the appropriate use of stimulus policies in the current economy and for future recessions and recoveries.

Dissertation (PhD) -- University of Stellenbosch, 2000.
ENGLISH ABSTRACT: The Lucas critique states that if expectations are not explicitly dealt with, conventional econometric models are inappropriate for policy analyses, as their coefficients are not policy invariant. The inclusion of rational expectations in ·conventional model building has been the most common response to this critique. The concept of rational expectations has received several interpretations. In numerous studies, these expectations are associated with model consistent expectations in the sense that expectations and model solutions are identical. To derive a solution, these models require unique algorithms and assumptions regarding their terminal state, in particular when forward-looking expectations are present. An alternative that avoids these issues is the concept of weak rational expectations, which emphasises that expectation errors should not be systematic. Expectations are therefore formed on the basis of an underlying structure, but full knowledge of the model is not essential. The accommodation of this type of rational expectations is accomplished by means of an explicit specification of an expectations equation consistent with the macro econometric model's broad structure. The estimation of coefficients relating to expectations is achieved through an Instrumental Variable approach. In South Africa, monetary policy has been consistent and transparent in line with the recommendations of the De Kock Commission. This allows the modelling of the policy instrument of the South African Reserve Bank, i.e. the Bank rate, by means of a policy reaction function. Given this transparency in monetary policy, the accommodation of expectations of the Bank rate is essential in modelling the full impact of monetary policy and in avoiding the Lucas critique. This is accomplished through weak rational expectations, based on the reaction function of the Reserve Bank. The accommodation of expectations of a policy instrument also allows the modelling of anticipated and unanticipated policies as alternative assumptions regarding the expectations process can be made during simulations. Conventional econometric models emphasise the demand side of the economy, with equations focusing on private consumption, investment, exports and imports and possibly changes in inventories. In this study, particular emphasis in the model specification is also placed on the impact of monetary policy on government debt and debt servicing costs. Other dimensions of the model include the modelling of the money supply and balance of payments, short- and long-term interest rates, domestic prices, the exchange rate, the wage rate and employment as well as weakly rational expectations of inflation and the Bank rate. The model has been specified and estimated by usmg concepts such as cointegration and Error Correction modelling. Numerous tests, including the assessment of the Root Mean Square Percentage Error, have been employed to test the adequacy of the model. Similarly, tests are carried out to ensure weak rational expectations. Numerous simulations are carried out with the model and the results are compared to relevant alternative studies. The simulation results show that the reduction of inflation by means of only monetary policy could impose severe costs on the economy in terms of real sector volatility.
AFRIKAANSE OPSOMMING: Die Lucas-kritiek beweer dat konvensionele ekonometriese modelle nie gebruik kan word vir beleidsontleding nie, aangesien dit nie voorsiening maak vir die verandering in verwagtings wanneer beleidsaanpassings gemaak word nie. Die insluiting van rasionele verwagtinge in konvensionele ekonometriese modelle is die mees algemene reaksie op die Lukas-kritiek. Ten einde die praktiese insluiting van rasionele verwagtings III ekonometriese modelbou te vergemaklik, word in hierdie studie gebruik gemaak van sogenaamde "swak rasionele verwagtings", wat slegs vereis dat verwagtingsfoute me sistematies moet wees nie. Die beraming van die koëffisiënte van die verwagtingsveranderlikes word gedoen met behulp van die Instrumentele Veranderlikes-benadering. Monetêre beleid in Suid-Afrika was histories konsekwent en deursigtig in ooreenstemming met die aanbevelings van die De Kock Kommissie. Die beleidsinstrument van die Suid-Afrikaanse Reserwebank, naamlik die Bankkoers, kan gevolglik gemodelleer word met behulp van 'n beleidsreaksie-funksie. Ten einde die Lukas-kritiek te akkommodeer, moet verwagtings oor die Bankkoers egter ingesluit word wanneer die volle impak van monetêre beleid gemodelleer word. Dit word vermag met die insluiting van swak rasionele verwagtings, gebaseer op die reaksie-funksie van die Reserwebank. Sodoende kan die impak van verwagte en onverwagte beleidsaanpassings gesimuleer word. Konvensionele ekonometriese modelle beklemtoon die vraagkant van die ekonomie, met vergelykings vir verbruik, investering, invoere, uitvoere en moontlik die verandering in voorrade. In hierdie studie word daar ook klem geplaas op die impak van monetêre beleid op staatskuld en die koste van staatsskuld. Ander aspekte wat gemodelleer word, is die geldvoorraad en betalingsbalans, korttermyn- en langtermynrentekoerse, binnelandse pryse, die wisselkoers, loonkoerse en indiensneming, asook swak rasionele verwagtings van inflasie en die Bankkkoers. Die model is gespesifiseer en beraam met behulp van ko-integrasie en die gebruik van lang-en korttermynvergelykings. Die gebruiklike toetse is uitgevoer om die toereikendheid van die model te toets. Verskeie simulasies is uitgevoer met die model en die resultate is vergelyk met ander relevante studies. Die gevolgtrekking word gemaak dat die verlaging van inflasie deur alleenlik gebruik te maak van monetêre beleid 'n swaar las op die ekonomie kan lê in terme van volatiliteit in die reële sektor.

The Southern African Development Community (SADC) aims to have a regional central bank by 2016 and a common currency by 2018. The member states are at the early stages of the process of regional economic integration, having launched a free trade area in 2008. Monetary integration is an advanced stage of regional economic integration that requires progressive changes in the participating countries. The purpose of this study is to determine the feasibility of monetary integration within the SADC countries and hence, provide policy recommendations to guide the integration process. To accomplish this, the study analyses the extent to which the member states meet the criteria for an optimum currency area (OCA) as well as the degree to which their economies are converging. The study finds that the main macroeconomic objectives of SADC countries differ due to a difference in the relative importance of monetary policy instruments in member states, which influences each country’s commitment towards achieving the macroeconomic convergence targets and harmonising policies. A more appropriate approach to macroeconomic convergence would be to allow for variable speed, geometry and depth in each country as premature adherence to convergence targets could prevent a harmonisation of the economies in the future and possibly destabilise the union. In addition, the study investigates the importance and similarities of the monetary aggregate channel, the interest rate channel, the exchange rate channel and the credit channel in the transmission of monetary policy using VAR analysis. This is important when considering monetary integration because differences in transmission mechanisms can result in asymmetric behaviour between member states, which in turn will prevent harmonisation of their economies. The results of the analysis suggest that SADC member states display asymmetries in their responses to monetary policy shocks as well as the relative importance of transmission mechanisms. In addition, the results suggest that national monetary policy is generally inefficient in determining economic performance in the member states. Furthermore, the study finds that the failure to meet the OCA criteria implies that the SADC member states will respond asymmetrically to shocks within a monetary union. With no effective alternative adjustment mechanisms in place, the effects of the shocks will endure in union members and possibly widen existing cyclical variation. Hence, monetary integration would not result in harmonisation of the economies of member states. It is therefore, concluded that the SADC countries were not suitable for monetary integration at present.

Many regions of the world would like to replicate the financial and monetary integration of the European Monetary Union (EMU). Member countries of the Association of Southeast Asian Nations (ASEAN) have shown an interest in such an arrangement. ASEAN is a political, cultural, and economic association that includes Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam. Many of these nations are experiencing rapid economic development while others are still relatively poor and under developed. As such, they appear to be an unlikely group for currency unification. Older studies suggest that multiple currency union groupings may be possible in the short run that could be unified into a whole at an unspecified time in the future. The issue has been studied for some time and appeared defunct with the onset of the Asian Financial Crisis. More than a decade has passed and another more global financial crisis has ensued leaving many Asian countries in better shape than their highly developed trading partners in the west. This leads to the need for further examination of the possible unification of some or all ASEAN members into a Regional Currency Arrangement. This dissertation evaluates the readiness of the ASEAN nations for monetary union using data from the post Asian Financial Crisis period. Results of a formal G-PPP test show the area is an optimum currency area. Analysis of other criteria shows incredible diversity across the countries in the region that would make unification a challenge. Coordination of monetary policy would be most difficult given the variety of inflation rates and differences in depth of financial system development as explored in chapter 2. Trade has increased in the region leading to better linkages among economies but the data shows that reaching full integration of all countries by the 2020 deadline without disruptions in some economies may still be difficult.

The impact of the world oil price increases of the early 1970s and those that occured in the 1980s, and the corresponding growth in revenue for the Nigerian economy had two major effects. First, it affected the official exchange rates and its determination, hence fiscal developments for the country. At the same time, the windfall also led to an unbalanced sectoral change within the economy. Both the internal and external economic situation since the oil shock had shown persistent imbalances requiring adjustments. In analysing the oil shock effect, a comprehensive assessment of the influences of exchange rates and structural adjustment problems employs the valuable strengths of the monetary approach aspects of exchange rates determination; particularly on the question of external payments adjustment and of inflation of domestic price levels. The function of exchange rate as an instrument of stabilization policy in an economy such as Nigeria is imperative. A relatively stable exchange rate standard in a world of significant variability is important in evaluating the impact of exchange rate changes on the economy; precisely because the financial infrastructures are at the developing state. When tight controls on the foreign trade sector also lead to the establishment of an unofficial market in foreign exchange, the question of stability would depend on which of the two markets adjust quicker. The market with the more rapid rate of adjustment can therefore provide a guide to exchange rate policy performance. In analysing the stuctural adjustments impact of the oil revenues, features of both national and global economic environment that are significant for macroeconomic performance, which are also proximately related to exchange rates determination are considered by using the dutch-disease framework. By laying emphasis on the fuction of exchange rates mechanism and the impact of the oil revenue increases at macroeconomic level, the large and persistent misalignment of real exchange rates and the general economic policies of the oil boom era are thus analysed in-depth.

Given the growing effect that globalisation and integration has had upon economies and regions, the process of monetary union has become an increasingly topical issue in economic policy debates. This has been driven in part by the experience and successes of the European Monetary Union (EMU), which is widely perceived as beneficial to member countries. The Southern African Development Community (SADC) is an example of a group of countries that has realised that there are benefits that may arise from economic integration. This paper makes use of an interest-rate pass through model to investigate whether the pass-through of monetary policy transmission in ten SADC countries has become more similar between January 1990 and December 2007 using monthly interest rate data. This is done to determine the extent of macroeconomic convergence that prevails within SADC, and consequently establish whether the formation of a regional monetary union is feasible. The results of the empirical pass-through model were robust and show that there are certain countries that have a more efficient and similar monetary transmission process than others. In particular, the countries that form the Common Monetary Area (CMA) and the Southern African Customs Union (SACU) tend to show evidence of convergence in monetary policy transmission, especially since 2000. In addition, from analysis of the long-run pass-through, the results reveal that there is evidence that Malawi and Zambia have shown signs of convergence toward the countries that form the CMA and SACU, in terms of monetary policy transmission. The study concludes that a SADC wide monetary union is currently not feasible based on the evidence provided from the results of the pass-through analysis. Despite this, it can be tentatively suggested that the CMA may be expanded to include Botswana, Malawi and Zambia.

Economics
Ph.D.
Poland has joined the European Union and is set to join the European Monetary Union (EMU) in the near future. Euro area membership involves potential costs and benefits. On the one hand, Poland will abolish the zloty/euro exchange rate and, as a result, transaction costs and exchange rate risk within the single currency area will be eliminated. On the other hand, it is argued that a single currency area implies the costs stemming from the sacrifice of autonomous monetary stabilization policy, which allows for an independent interest rate policy, and an exchange rate adjustment mechanism in the presence of country-specific shocks. This dissertation focuses on a quantitative assessment of the economic costs of joining the EMU. The evaluation of the volatility of main macroeconomic variables under the current inflation targeting regime and fixed exchanged rate is performed within an optimizing dynamic general equilibrium model of a small open economy with nominal rigidities. Model dynamics under terms of trade and world interest rate shocks are investigated. We find that the euro adoption implies a higher macroeconomic volatility. Analyzing the impact of terms of trade shock, the inflation targeting regime is more favorable, as an inability to devalue the currency under the euroization scenario leads to a slower recovery in demand for non-tradable goods and thus consumption. Considering the impact of a sudden decline in the world interest rate, an excessive zloty appreciation and the tightening of monetary policy under inflation targeting pushes the economy into a deeper recession compared to the adoption of the euro regime, while long-run implications are almost the same for the two scenarios.
Temple University--Theses

Aquesta tesi contribueix a la literatura que analitza conjuntament la política fiscal i monetària. Des de l'inici de la crisi econòmica mundial al 2007-2008, moltes economies desenvolupades han experimentat notables fluctuacions econòmiques. La majoria de polítiques estabilitzadores en aquests països han consistit en grans estímuls fiscals que han endegat el debat sobre quines polítiques, particularment política monetària, caldrà implementar per tal de sostenir o ajustar el deute públic generat. El meu treball estudia el disseny de polítiques en un entorn dinàmic d'equilibri general on totes les forces descrites anteriorment hi tenen un paper. En el primer capítol, utilitzo un model New Keynesian per a estudiar la política monetària i fiscal òptima en un entorn on la barrera del tipus d'interès no negatiu condueix l'economia a la trampa de la liquiditat. L'efectivitat de les polítiques en aquest entorn està determinat per si el govern pot emetre deute públic o no. Quan el govern no pot generar deute, es veu obligat a utilitzar l'instrument de la despesa. En canvi, si el govern pot generar deute, és òptim utilitzar instruments recaptadors com els impostos sobre el treball ja que les distorsions d'aquest instrument poden ajustar els problemes generats pel deute quan s'entra en la trampa de la liquiditat. A més a més, demostro que el risc de caure en la trampa de la liquiditat condueix el govern a acumular deute de manera que el risc de arribar a la barrera del tipus d'interès no negatiu. En el segon capítol, estudio com la com la velocitat òptima del ajustament del deute públic, i el conjunt de polítiques necessàries per aconseguir-lo, depenen de l'estructura de pagaments del deute. Sota l'assumpció que el deute pren la forma de bons nominals a un període, per a nivells plausibles de deute, la sostenibilitat fiscal requereix un ràpid ajustament del deute mentre la política monetària s'encarrega d'acomodar les fluctuacions. Pagaments de deute més dissipats cap al futur alteren els incentius del govern per alterar les polítiques presents i per a fer ajustos que modifiquin el preu de l'endeutament en el futur. Tenint en compte un nivell plausible de l'escala temporal de pagaments del deute, fa l'ajustament del deute molt més gradual, cosa que està en línia amb l'evidència empírica sobre la persistència del deute públic. En el cas d'una cartera de bons, amb un període de venciment que d'anys o més, no és òptim que la política monetària s'utilitzi per a acomodar les fluctuacions. En el tercer capítol, faig una extensió de la teoria de risc sobirà d'Uribe (2006) en l'entorn d'una unió monetària amb mercats incomplets. En aquest cas, les polítiques d'impagament no només serveixen per garantir la sostenibilitat fiscal i escapar de possibles inflacions explosives sinó que poden servir com assegurança de les llars contra risc fiscal específic de cada país. Caracteritzo analíticament una solució de les dinàmiques de primer orde del model i comparo l'equilibri amb el cas en que hi ha mercats complets. Per tal que aquest dos escenaris coincideixin, cal que la política de pagaments sigui imperfectament discriminatòria. Un resultat complementari és que, sota el supòsit discriminació imperfecta, canvis en la política monetària afecten l'economia real en els períodes d'ajustament del deute fins i tot en l'absència de rigideses nominals. Finalment, descric el disseny d'una política d'impagament que aconsegueix portar l'economia al escenari de mercat complets.
This thesis contributes to the literature on the joint analysis of monetary and fiscal policy. Since the onset of the global economic downturn in 2007-2008, many advanced economies experienced large economic fluctuations. Stabilizing policy responses in those countries often included large fiscal stimulus packages that in turn triggered discussions of the policy measures---including monetary policy---that would ensure debt sustainability or perform debt adjustment if required. In my work I study policy design in the framework of dynamic general equilibrium models that capture such pressing policy issues. In the first chapter I study optimal monetary and fiscal policy in a New Keynesian model with an occasionally binding zero lower bound that leads to liquidity trap episodes. I analyze the use of government spending and labor income tax as components of the discretionary fiscal stimulus package at the liquidity trap. Reliance on either of these instruments depends on whether the government budget is relaxed or has to be balanced. If the government has to balance its budget period by period, it relies more on the spending instrument. Varying the debt burden across time makes the government rely more on the use of labor taxes because discretionary incentives introduced by debt help to reduce the time-inconsistency problem of the tax rate response at the liquidity trap. Moreover, I show that the risk of falling into the liquidity trap leads to the accumulation of the optimal long run government debt buffer that reduces the frequency of reaching the zero lower bound. In the second chapter I study how the speed of optimal government debt adjustment and the monetary-fiscal policy mix that implements it depend on the maturity structure of debt when policy is chosen discretionary. Under the assumption of debt taking the form of one-period nominal bonds, for plausible levels of debt, fiscal sustainability requires prompt adjustment of debt and monetary policy bears a significant burden of implementing the adjustment. Higher average maturity reduces both the incentive of the government to alter current policy and the incentive to strategically affect future self so as to improve the price of borrowing. Accounting for a plausible average maturity makes the optimal debt adjustment much more gradual, which is in line with the existing empirical evidence on the persistence of government debt. In the case of bond portfolios with the average maturity ranging from several years and higher, it is no longer optimal for monetary policy to accommodate debt adjustment. In the thirds chapter I extend a fiscal theory of the sovereign risk by Uribe (2006) into the setting of a monetary union with incomplete markets. Default policy then not only serves the purpose of securing fiscal sustainability and escaping explosive inflation paths but at the same time can take on the role of insuring households across the union against country-specific fiscal risk. I characterize analytically a solution to the model's first-order dynamics and compare equilibrium consumption allocation against a benchmark of the perfect risk-sharing. For these two to coincide one necessary condition has to be satisfied, namely default policy has to be imperfectly discriminatory. The companion result is that, under imperfectly discriminatory default, changes in the monetary policy rule affect real economic activity during the periods of debt adjustment despite the absence of nominal rigidities. Finally, I discuss design of a simple default rule that attains perfect risk-sharing in equilibrium.

La seguente tesi e’ costituita da tre diversi elaborati, il primo e’ l’estensione di un modello di equilibrio generale a due regioni (Benigno JIE 2004) con l’intento di calcolare i pesi ottimali per l’inflazione dell’area euro utilizzando micro dati sull’eterogeneità delle rigidità dei prezzi in Europa. Il secondo e il terzo elaborato si focalizzano invece sulle crisi d’insolvenza con l’obiettivo di selezionare le variabili che forniscono maggiori informazioni per la previsione della crisi. La metodologia utilizzata e’ l’analisi della transvariazione. Mentre il secondo ‘essay’ si concentra sulla versione univariata, il terzo estende la metodologia al caso multivariato. Il primo analizza le crisi d’insolvenza più severe degli anni ’90, la seconda utilizza invece gli episodi di crisi analizzati da Frankel e Rose (1996).
The present work is made of three different essays, the first is an extension of a two region general equilibrium model (Benigno JIE 2004), with the intent of calculating optimal weights for EU inflation using micro data on the level of price rigidities, the second and the third have as main focus financial and currency country crises, with the task of selecting the most important variables in terms of crisis prediction by means of a descriptive statistics methodology called transvariation analysis. While the second essay focuses on univariate transvariation, the third extends the methodology to a multivariate framework. The last two essays are based on two different datasets. The first studies the most recent deep financial crises of the 1990s and the source is IMF, International Financial Statistics, the second uses a vast sample of currency crisis episodes taken from Frankel and Rose (1996) dataset made of annual data on more than one hundred developed countries from 1971 through 1992 and defining currency crash as a large change of nominal exchange rate that is also a substantial increase in the rate of change of nominal depreciation. The source in this case is World Bank, World Development Indicators.

The premise of this paper is that in a monetary production economy, policy decisions of the central bank, or more generally the 'monetary authority', set the tone not only for nominal interest rates but also for 'real' interest rates defined in the usual way. This is a different question than that of which institution(s) acquire the status of monetary authority at any particular stage of socioeconomic or technological development. Rather the suggestion is that the existence of some such social structure is a prerequisite if anything resembling capitalist monetary production is to be viable. The paper demonstrates that a coherent macroeconomic theory can be elaborated on this basis, including an explanation of economic growth, the business cycle, inflation, the functional distribution of income, the 'Keynesian' problem of the impact of demand growth on economic growth, endogenous money, cumulative causation, and endogenous technical change. (author's abstract)
Series: Working Papers Series "Growth and Employment in Europe: Sustainability and Competitiveness"

The extent of influence of monetary policies on housing prices in the Greater China region is examined in this study using data from 2005-2015. Using vector autoregression, the effects of housing indices, interest rates, money supply as well as stock market index are accessed. Results suggest that monetary policies do in fact influence housing market trends in Greater China. Furthermore, the extent of influence on Mainland China on the Hong Kong and Taiwan markets is also tested. Results imply a greater co-integration between the Mainland and Hong Kong market than that between Mainland and Taiwan. The effect of exchange rate is deemed as insignificant. Housing policies set by national and local governments show to be less influential than predicted. Lastly, granger causality is not present between the different markets within this study.

This thesis considers how fiscal and monetary policy should be conducted in resourcerich economies. It consists of three papers addressing: whether governments should spend, save or invest volatile oil income; the assets they should save in; and how monetary policy should respond. The first, “Eight principles for managing resource wealth”, shows that capital-scarce countries should save relatively less against oil price volatility, and invest more in domestic capital. They also should prepare for volatility in advance, and treat savings as a source of income rather than a temporary buffer. To show this the paper develops a framework that nests a variety of existing results, which are presented in eight principles. The second, “The Elephant in the Ground: Oil extraction and asset allocation in sovereign wealth funds”, shows that governments should use sovereign wealth funds to offset oil price risk, extract oil faster if its price is pro-cyclical, and use precautionary savings to manage any residual volatility. To do this it combines three strands of literature for the first time: on continuous-time portfolio theory, oil extraction and precautionary savings. The third, “Optimal monetary responses to oil discoveries”, addresses the anticipation effects around an oil discovery. It shows that the terms of trade will need to appreciate twice: once when oil is discovered and consumers anticipate future revenues; and again when the government begins spending the revenues. Oil wealth will give the monetary authority an incentive to appreciate the terms of trade, in addition to stabilising domestic inflation and the output gap. Optimal policy is well-approximated by a standard monetary rule that also responds to expected changes in the natural level of output.

This study is motivated by the overall poor performance of International Monetary Fund (IMF) programs in recipient countries in terms of economic growth consequences, and tries to explore the relevance of institutional determinants for economic growth in these program countries. The analysis, at the same time, also takes into consideration the claim by New Institutional Economics (NIE) literature, which points out an overall positive consequence of institutional quality determinants on economic growth for countries in general. Taking a panel data of IMF member countries, the thesis primarily focuses on the IMF program countries, during 1980-2009; a time period during which the number of IMF programs witnessed an increasing trend. Firstly, important determinants of economic- and political institutional quality in IMF program countries are estimated by applying the System- GMM approach, so as to find significant determinants among them. Here, a parliamentary form of government, aggregate governance level, civil liberties, openness, and property rights all enhance overall institutional quality. Specifically, greater monetary- and investment freedom are conducive for political institutional quality, while military in power impacts negatively. Moreover, economic growth is conducive for enhancing economic institutional quality. Thereafter, the impact of the significant institutional determinants is then estimated on real economic growth, both directly, and also indirectly, through the channel of macroeconomic stability. Results mainly validate that institutional determinants overall play a positive role in reducing macroeconomic instability, and through it, and also independently, enhance real economic growth. In the last part of the thesis, Pakistan is selected as a representative example of a frequent user of IMF resources. Here, by applying the Vector Autoregression (VAR) model techniques, various counterfactual scenarios are estimated for a period of 1980-2014, to see impact of an institutional determinant, KOF index of globalization on macroeconomic instability and real economic growth. Results highlight that through enhanced focus on institutional reduced, and hence higher growth rate of GDP can be achieved.

En esta tesis estudio varias cuestiones de política monetaria y fiscal usando modelos de equilibrio generales completamente micro-fundados. El primer capítulo de esta tesis trata la cuestión de cómo la políticas monetarias y fiscales se deben conducir en una unión monetaria donde hay un solo banco central que fija el tipo de interés común mientras que el gobierno todavía conserva independencia completa en las decisiones de políticas fiscales. En el segundo capítulo se dedica a estudiar si es posible racionalizar en un modelo keynesiano completamente micro-fundado la existencia de una unión monetaria. El último capítulo investiga en qué medida el incentivo de las autoridades de política económica en una economía abierta de mejorar los términos de intercambio en su favor se puede compensar por la externalidad de relocalización de la producción (home market effect).
In this thesis I study different kinds of monetary and fiscal policy issues by using fully microfounded general equilibrium models. The first chapter addresses the question of how monetary and fiscal policy should be conducted in a monetary union where there is a single central bank that sets the common interest rate while governments still retain full independence in fiscal policy decisions. The second chapter is devoted to study whether it is possible to rationalize, within a fully microfounded New Keynesian framework, the existence of a monetary union. The last chapter investigates to what extent the incentive of open economy policy makers to improve the terms of trade in their favour can be outweighed by the production relocation externality (the so called home market effect).

This dissertation consists of three essays on capital controls and exchange rate regimes. The first essay, under the background of international monetary policy trilemma, empirically investigates the validity of the proposition that holding the degree of exchange rate stability constant, a decrease in capital mobility through imposition of capital controls will enhance monetary independence. Using a panel dataset covering 88 countries for the 1995-2010 period and system GMM estimation, this paper finds that 1) capital controls help improve a country’s monetary independence; 2) the effectiveness of capital controls depends on the types of assets and the direction of flows they are imposed; 3) the choice of exchange rate regime has important impact on the effectiveness of capital controls on monetary independence. The second essay examines the role of capital controls on economic growth. Conventional wisdom suggests that allowing international capital flows improves domestic investment and growth by providing extra resources through international capital market, yet the flows can be misallocated to finance speculative or low-quality domestic investments. Using a panel dataset covering 78 countries over 1995-2009, this paper finds that 1) capital control policies promote economic growth after taking into account a country’s de facto level of capital flows; 2) controls on capital inflows helps a country’s economic growth, but not controls on outflows; 3) restrictions on different asset types affect growth differently. Capital controls on equity type flows are less effective than controls on debt type flows or direct investment. The third examines the role of exchange rate flexibility on current account balances. Global imbalances have become an important issue for economists and policy makers. Greater exchange rate flexibility is often suggested as a means to achieve faster and more efficient adjustment in the current account. However, previous empirical studies show little support for this hypothesis. This essay revisits this issue with a large panel dataset and Threshold VAR model and finds that 1) the speed of the current account adjustment is higher in a regime with greater exchange rate variability; 2) some existing popular exchange rate classifications may not capture actual exchange rate variability as well as expected.

This thesis addresses three relevant macroeconomic issues: (i) why

Central Banks behave so cautiously compared to optimal theoretical

benchmarks, (ii) do monetary variables add information about

future Euro Area inflation to a large amount of non monetary

variables and (iii) why national saving and investment are so

correlated in OECD countries in spite of the high degree of

integration of international financial markets.

The process of innovation in the elaboration of economic theory

and statistical analysis of the data witnessed in the last thirty

years has greatly enriched the toolbox available to

macroeconomists. Two aspects of such a process are particularly

noteworthy for addressing the issues in this thesis: the

development of macroeconomic dynamic stochastic general

equilibrium models (see Woodford, 1999b for an historical

perspective) and of techniques that enable to handle large data

sets in a parsimonious and flexible manner (see Reichlin, 2002 for

an historical perspective).

Dynamic stochastic general equilibrium models (DSGE) provide the

appropriate tools to evaluate the macroeconomic consequences of

policy changes. These models, by exploiting modern intertemporal

general equilibrium theory, aggregate the optimal responses of

individual as consumers and firms in order to identify the

aggregate shocks and their propagation mechanisms by the

restrictions imposed by optimizing individual behavior. Such a

modelling strategy, uncovering economic relationships invariant to

a change in policy regimes, provides a framework to analyze the

effects of economic policy that is robust to the Lucas'critique

(see Lucas, 1976). The early attempts of explaining business

cycles by starting from microeconomic behavior suggested that

economic policy should play no role since business cycles

reflected the efficient response of economic agents to exogenous

sources of fluctuations (see the seminal paper by Kydland and Prescott, 1982}

and, more recently, King and Rebelo, 1999). This view was challenged by

several empirical studies showing that the adjustment mechanisms

of variables at the heart of macroeconomic propagation mechanisms

like prices and wages are not well represented by efficient

responses of individual agents in frictionless economies (see, for

example, Kashyap, 1999; Cecchetti, 1986; Bils and Klenow, 2004 and Dhyne et al. 2004). Hence, macroeconomic models currently incorporate

some sources of nominal and real rigidities in the DSGE framework

and allow the study of the optimal policy reactions to inefficient

fluctuations stemming from frictions in macroeconomic propagation

mechanisms.

Against this background, the first chapter of this thesis sets up

a DSGE model in order to analyze optimal monetary policy in an

economy with sectorial heterogeneity in the frequency of price

adjustments. Price setters are divided in two groups: those

subject to Calvo type nominal rigidities and those able to change

their prices at each period. Sectorial heterogeneity in price

setting behavior is a relevant feature in real economies (see, for

example, Bils and Klenow, 2004 for the US and Dhyne, 2004 for the Euro

Area). Hence, neglecting it would lead to an understatement of the

heterogeneity in the transmission mechanisms of economy wide

shocks. In this framework, Aoki (2001) shows that a Central

Bank maximizing social welfare should stabilize only inflation in

the sector where prices are sticky (hereafter, core inflation).

Since complete stabilization is the only true objective of the

policymaker in Aoki (2001) and, hence, is not only desirable

but also implementable, the equilibrium real interest rate in the

economy is equal to the natural interest rate irrespective of the

degree of heterogeneity that is assumed. This would lead to

conclude that stabilizing core inflation rather than overall

inflation does not imply any observable difference in the

aggressiveness of the policy behavior. While maintaining the

assumption of sectorial heterogeneity in the frequency of price

adjustments, this chapter adds non negligible transaction

frictions to the model economy in Aoki (2001). As a

consequence, the social welfare maximizing monetary policymaker

faces a trade-off among the stabilization of core inflation,

economy wide output gap and the nominal interest rate. This

feature reflects the trade-offs between conflicting objectives

faced by actual policymakers. The chapter shows that the existence

of this trade-off makes the aggressiveness of the monetary policy

reaction dependent on the degree of sectorial heterogeneity in the

economy. In particular, in presence of sectorial heterogeneity in

price adjustments, Central Banks are much more likely to behave

less aggressively than in an economy where all firms face nominal

rigidities. Hence, the chapter concludes that the excessive

caution in the conduct of monetary policy shown by actual Central

Banks (see, for example, Rudebusch and Svennsson, 1999 and Sack, 2000) might not

represent a sub-optimal behavior but, on the contrary, might be

the optimal monetary policy response in presence of a relevant

sectorial dispersion in the frequency of price adjustments.

DSGE models are proving useful also in empirical applications and

recently efforts have been made to incorporate large amounts of

information in their framework (see Boivin and Giannoni, 2006). However, the

typical DSGE model still relies on a handful of variables. Partly,

this reflects the fact that, increasing the number of variables,

the specification of a plausible set of theoretical restrictions

identifying aggregate shocks and their propagation mechanisms

becomes cumbersome. On the other hand, several questions in

macroeconomics require the study of a large amount of variables.

Among others, two examples related to the second and third chapter

of this thesis can help to understand why. First, policymakers

analyze a large quantity of information to assess the current and

future stance of their economies and, because of model

uncertainty, do not rely on a single modelling framework.

Consequently, macroeconomic policy can be better understood if the

econometrician relies on large set of variables without imposing

too much a priori structure on the relationships governing their

evolution (see, for example, Giannone et al. 2004 and Bernanke et al. 2005).

Moreover, the process of integration of good and financial markets

implies that the source of aggregate shocks is increasingly global

requiring, in turn, the study of their propagation through cross

country links (see, among others, Forni and Reichlin, 2001 and Kose et al. 2003). A

priori, country specific behavior cannot be ruled out and many of

the homogeneity assumptions that are typically embodied in open

macroeconomic models for keeping them tractable are rejected by

the data. Summing up, in order to deal with such issues, we need

modelling frameworks able to treat a large amount of variables in

a flexible manner, i.e. without pre-committing on too many

a-priori restrictions more likely to be rejected by the data. The

large extent of comovement among wide cross sections of economic

variables suggests the existence of few common sources of

fluctuations (Forni et al. 2000 and Stock and Watson, 2002) around which

individual variables may display specific features: a shock to the

world price of oil, for example, hits oil exporters and importers

with different sign and intensity or global technological advances

can affect some countries before others (Giannone and Reichlin, 2004). Factor

models mainly rely on the identification assumption that the

dynamics of each variable can be decomposed into two orthogonal

components - common and idiosyncratic - and provide a parsimonious

tool allowing the analysis of the aggregate shocks and their

propagation mechanisms in a large cross section of variables. In

fact, while the idiosyncratic components are poorly

cross-sectionally correlated, driven by shocks specific of a

variable or a group of variables or measurement error, the common

components capture the bulk of cross-sectional correlation, and

are driven by few shocks that affect, through variable specific

factor loadings, all items in a panel of economic time series.

Focusing on the latter components allows useful insights on the

identity and propagation mechanisms of aggregate shocks underlying

a large amount of variables. The second and third chapter of this

thesis exploit this idea.

The second chapter deals with the issue whether monetary variables

help to forecast inflation in the Euro Area harmonized index of

consumer prices (HICP). Policymakers form their views on the

economic outlook by drawing on large amounts of potentially

relevant information. Indeed, the monetary policy strategy of the

European Central Bank acknowledges that many variables and models

can be informative about future Euro Area inflation. A peculiarity

of such strategy is that it assigns to monetary information the

role of providing insights for the medium - long term evolution of

prices while a wide range of alternative non monetary variables

and models are employed in order to form a view on the short term

and to cross-check the inference based on monetary information.

However, both the academic literature and the practice of the

leading Central Banks other than the ECB do not assign such a

special role to monetary variables (see Gali et al. 2004 and

references therein). Hence, the debate whether money really

provides relevant information for the inflation outlook in the

Euro Area is still open. Specifically, this chapter addresses the

issue whether money provides useful information about future

inflation beyond what contained in a large amount of non monetary

variables. It shows that a few aggregates of the data explain a

large amount of the fluctuations in a large cross section of Euro

Area variables. This allows to postulate a factor structure for

the large panel of variables at hand and to aggregate it in few

synthetic indexes that still retain the salient features of the

large cross section. The database is split in two big blocks of

variables: non monetary (baseline) and monetary variables. Results

show that baseline variables provide a satisfactory predictive

performance improving on the best univariate benchmarks in the

period 1997 - 2005 at all horizons between 6 and 36 months.

Remarkably, monetary variables provide a sensible improvement on

the performance of baseline variables at horizons above two years.

However, the analysis of the evolution of the forecast errors

reveals that most of the gains obtained relative to univariate

benchmarks of non forecastability with baseline and monetary

variables are realized in the first part of the prediction sample

up to the end of 2002, which casts doubts on the current

forecastability of inflation in the Euro Area.

The third chapter is based on a joint work with Domenico Giannone

and gives empirical foundation to the general equilibrium

explanation of the Feldstein - Horioka puzzle. Feldstein and Horioka (1980) found

that domestic saving and investment in OECD countries strongly

comove, contrary to the idea that high capital mobility should

allow countries to seek the highest returns in global financial

markets and, hence, imply a correlation among national saving and

investment closer to zero than one. Moreover, capital mobility has

strongly increased since the publication of Feldstein - Horioka's

seminal paper while the association between saving and investment

does not seem to comparably decrease. Through general equilibrium

mechanisms, the presence of global shocks might rationalize the

correlation between saving and investment. In fact, global shocks,

affecting all countries, tend to create imbalance on global

capital markets causing offsetting movements in the global

interest rate and can generate the observed correlation across

national saving and investment rates. However, previous empirical

studies (see Ventura, 2003) that have controlled for the effects

of global shocks in the context of saving-investment regressions

failed to give empirical foundation to this explanation. We show

that previous studies have neglected the fact that global shocks

may propagate heterogeneously across countries, failing to

properly isolate components of saving and investment that are

affected by non pervasive shocks. We propose a novel factor

augmented panel regression methodology that allows to isolate

idiosyncratic sources of fluctuations under the assumption of

heterogenous transmission mechanisms of global shocks. Remarkably,

by applying our methodology, the association between domestic

saving and investment decreases considerably over time,

consistently with the observed increase in international capital

mobility. In particular, in the last 25 years the correlation

between saving and investment disappears.

Doctorat en sciences économiques, Orientation économie
info:eu-repo/semantics/nonPublished

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O estouro da crise do subprime em 2008 nos EUA e da crise soberana europeia em 2010 renovou o interesse acadêmico no papel desempenhado pela atividade creditícia nos ciclos econômicos. O propósito desse trabalho é apresentar evidências empíricas acerca do canal do crédito da política monetária para o caso brasileiro, usando técnicas econométricas distintas. O trabalho é composto por três artigos. O primeiro apresenta uma revisão da literatura de fricções financeiras, com especial ênfase nas suas implicações sobre a condução da política monetária. Destaca-se o amplo conjunto de medidas não convencionais utilizadas pelos bancos centrais de países emergentes e desenvolvidos em resposta à interrupção da intermediação financeira. Um capítulo em particular é dedicado aos desafios enfrentados pelos bancos centrais emergentes para a condução da política monetária em um ambiente de mercado de capitais altamente integrados. O segundo artigo apresenta uma investigação empírica acerca das implicações do canal do crédito, sob a lente de um modelo FAVAR estrutural (SFAVAR). O termo estrutural decorre da estratégia de estimação adotada, a qual possibilita associar uma clara interpretação econômica aos fatores estimados. Os resultados mostram que choques nas proxies para o prêmio de financiamento externo e o volume de crédito produzem flutuações amplas e persistentes na inflação e atividade econômica, respondendo por mais de 30% da decomposição de variância desta no horizonte de três anos. Simulações contrafactuais demonstram que o canal do crédito amplificou a contração econômica no Brasil durante a fase aguda da crise financeira global no último trimestre de 2008, produzindo posteriormente um impulso relevante na recuperação que se seguiu. O terceiro artigo apresenta estimação Bayesiana de um modelo DSGE novo-keynesiano que incorpora o mecanismo de acelerador financeiro desenvolvido por Bernanke, Gertler e Gilchrist (1999). Os resultados apresentam evidências em linha com aquelas obtidas no artigo anterior: inovações no prêmio de financiamento externo – representado pelos spreads de crédito – produzem efeitos relevantes sobre a dinâmica da demanda agregada e inflação. Adicionalmente, verifica-se que choques de política monetária são amplificados pelo acelerador financeiro. Palavras-chave: Macroeconomia, Política Monetária, Canal do Crédito, Acelerador Financeiro, FAVAR, DSGE, Econometria Bayesiana

Abstract of thesis submitted in partial fulfilment of the requirements for the Degree of Master of Commerce and Management Dynamics of macroeconomic variables in Fiji : a cointegrated VAR analysis By Shiu Raj Singh The objective of this study is to examine how macroeconomic variables of Fiji inter-relate with aggregate demand and co-determine one another using a vector autoregression (VAR) approach. This study did not use a prior theoretical framework but instead used economic justification for selection of variables. It was found that fiscal policy, which is generally used as a stabilisation tool, did not have a positive effect on real Gross Domestic Product (GDP) growth in the short term. Effects on GDP growth were positive over the long term but not statistically significant. Furthermore, expansionary fiscal policy caused inflationary pressures. Fiji has a fixed exchange rate regime, therefore, it was expected that the focus of monetary policy would be the maintenance of foreign reserves. It was, however, found that monetary expansion in the short term resulted in positive effects on real GDP growth and resulted in inflation. The long term effects of monetary policy on real GDP growth were negative, which are explained by the fixed exchange rate regime, endogenous determination of money supply by the central bank, an unsophisticated financial market and, perhaps, an incomplete transmission of the policy. Both merchandise trade and visitor arrivals growth were found to positively contribute to short term and long term economic growth. Political instability was found not to have significant direct effects on real GDP growth but caused a significant decline in visitor arrivals which then negatively affected economic growth in the short term.