Three Essays on Empirical Analysis of Economic Policy
|Author:||PhDr. Jaromír Baxa, Ph.D. (21.11.2012)|
|Year:||2012 - winter|
|Leaders:|| prof. Ing. Miloslav Vošvrda CSc.
|Work type:|| Dissertations
|Awards and prizes:|
|Abstract:||This dissertation thesis is focused on the empirical analysis of monetary and fiscal policy using nonlinear models. It consists of three parts, the first two parts deal with the analysis of monetary policy using the monetary policy rule with time-varying parameters. The third part of this thesis is focused on finding answer to the question, whether the negative effects of financial instability on economic growth can be mitigated by expansionary fiscal policy.
In the first part, I examine the evolution of monetary policy rules in a group of inflation targeting countries (Australia, Canada, New Zealand, Sweden and the United Kingdom). I apply a moment-based estimator in a time-varying parameter model with endogenous regressors. Using this novel flexible framework, the main findings are threefold. First, with adoption of inflation targeting, coefficients in the monetary policy rules changed rather gradually, pointing to the importance of applying a time- varying estimation framework. Second, the interest rate smoothing parameter is much lower than typically reported by previous timeinvariant estimates of policy rules. Third, the response of interest rates to inflation is particularly strong during periods when central bankers want to break a record of high inflation, such as in the UK or Australia at the beginning of the 1980s. Contrary to common perceptions, the response of interest rates to inflation becomes less aggressive after the adoption of inflation targeting, suggesting a positive anchoring effect of this regime on inflation expectations. This result is supported by our finding that inflation persistence typically decreased after the adoption of inflation targeting.
The second part discusses whether and how the selected central banks responded to episodes of financial stress over the last three decades. The time-varying monetary policy rule is extended for an indicator of financial stress, in order to show the departures of policy rules under financial instability. To measure the financial stress, I use a new financial stress dataset developed by the International Monetary Fund. This particular choice not only allows testing of whether central banks responded to financial stress or not, but also detects the periods and types of stress that were the most worrying for monetary authorities and quantifies the intensity of the policy response. The findings suggest that central banks often change policy rates, mainly decreasing them, in the face of high financial stress. However, the size of the policy response varies substantially over time as well as across countries, with the 2008–2009 financial crisis being the period of the most severe and generalized response. With regard to the specific components of financial stress, most central banks seemed to respond to stock-market stress and bank stress, while exchangerate stress is found to drive the reaction of central banks only in more open economies.
In the third part, I use a threshold VAR model to study whether the effects of fiscal policy on economic activity differ depending on financial market conditions. In particular, I investigate the possibility of a non-linear propagation of fiscal developments according to different financial market stress regimes. More specifically I employ a quarterly dataset, for the U.S., the U.K., Germany and Italy, for the period 1980:4-2009:4, encompassing macro, fiscal and financial variables. The results show that output
reacts mostly positively to a fiscal shock in both financial stress regimes, and differences in estimated multipliers across regimes are relatively small. The large time-variation and the estimated nonlinear impulse responses suggest that the size of the fiscal multipliers is higher than average in the 2008-2009 crisis. Furthermore, a financial stress shock has a negative effect on output and worsens the fiscal situation.