Essays On Monetary And Fiscal Policy Interactions In Small Open Economies
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Essays On Monetary And Fiscal Policy Interactions In Small Open Economies
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Author : Thitima Chucherd
language : en
Publisher:
Release Date : 2013
Essays On Monetary And Fiscal Policy Interactions In Small Open Economies written by Thitima Chucherd and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2013 with Fiscal policy categories.
This thesis addresses interactions between monetary and fiscal policies in a theoretical dynamic stochastic general equilibrium (DSGE) model of a small open economy and in an empirical model under a structural vector error correction model (SVECM). The thesis consists of three essays. The contribution is both theoretical and empirical that enables a better understanding of the complexity of interactions between monetary and fiscal policies in small open economies. The first essay examines the equilibrium determinacy under monetary and fiscal rules. The goal is to investigate how monetary and fiscal policy interactions ensure a unique and non-explosive (determinate) equilibrium for a small open economy. The study focuses when policy makers implement a set of policy mixes to address domestic output price inflation control for monetary policy, debt stabilization for fiscal policy, and joint output stabilization tasks. The result indicates that two policy schemes facilitate a determinate equilibrium. First, monetary policy actively controls inflation when fiscal policy sets a sufficient feedback on debt. Second, monetary policy becomes passive against inflation when fiscal policy is insolvent. Adding output stabilization to each rule simply causes variants of this fundamental. An interest rate rule with output stabilization can be more passive against inflation while providing a stronger response to the output gap. Fiscal policy is required to set higher feedback on debt along with its stronger counter-cyclical policy. The second essay links between the equilibrium determinacy and policy optimization. This essay provides insights into the design of policy mixes and compares determinacy outcomes between two theoretical models of a small open economy: with and without an explicit exchange rate role. This study shows that policy interactions in a small open economy with an endogenous exchange rate is quite sophisticated, especially when a monetary rule is added with an output stabilization task and/or targeted to Consumer Price Index (CPI) inflation. Additional concern for monetary policy in an open economy causes a partial offset to its reaction on domestic output price inflation that weakens its effect on the real debt burden. To minimize economic fluctuations, policy makers should mute the role of output stabilization for monetary policy, and set minimum feedback on debt that is compatible with the degree of counter-cyclical fiscal policy. Substantially active response to inflation is satisfactory for monetary policy with CPI inflation targeting. The third essay empirically presents monetary and fiscal policy interactions in Thailand's SVECM suggested by a theoretical DSGE model developed from the previous essays. This essay shows that the DSGE-SVECM model can be supported by Thai data. A shock to monetary policy is effective with a lag. Government spending policy is also effective with a lag and some crowding-out effects on output. An adverse shock in tax policy unexpectedly stimulates the economy, indicating room for enhancing economic growth by relaxing revenue constraint. Monetary policy is mainly implemented to correct a consequence of a fiscal shock on inflation (and also the domestic and foreign shocks), while fiscal policy appears to counter a consequence of the monetary policy shock on output.
Essays On Macroeconomic Policies And Household Heterogeneity
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Author : Gergő Motyovszki
language : en
Publisher:
Release Date : 2021
Essays On Macroeconomic Policies And Household Heterogeneity written by Gergő Motyovszki and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2021 with Macroeconomics categories.
This thesis is composed of three independent chapters, but all centered around the broader topic of how macroeconomic policies interact with various aspects of household heterogeneity. Monetary Policy and Inequality under Labor Market Frictions and Capital-Skill Complementarity We provide a new channel through which monetary policy has distributional consequences at business cycle frequencies. We show that an unexpected monetary easing increases labor income inequality between high and less-skilled workers. In particular, this effect is prominent in sectors intensive in less-skilled labor, that exhibit high degree of capital-skill complementarity (CSC) and are subject to matching inefficiencies. To rationalize these findings we build a New Keynesian DSGE model with asymmetric search and matching (SAM) frictions across the two types of workers and CSC in the production function. We show that CSC on its own introduces a dynamic demand amplification mechanism: the increase in high-skilled employment after a monetary expansion makes complementary capital more productive, encouraging a further rise in investment demand and creating a multiplier effect. SAM asymmetries magnify this channel. Monetary-Fiscal Interactions and Redistribution in Small Open Economies Ballooning public debts in the wake of the covid-19 pandemic can present monetary-fiscal policies with a dilemma if and when neutral real interest rates rise, which might arrive sooner in emerging markets: policymakers can stabilize debts either by relying on fiscal adjustments (AM-PF) or by tolerating higher inflation (PM-AF). The choice between these policy mixes affects the efficacy of the fiscal expansion already today and can interact with the distributive properties of the stimulus across heterogeneous households. To study this, I build a two agent New Keynesian (TANK) small open economy model with monetary-fiscal interactions. Targeting fiscal transfers more towards high-MPC agents increases the output multiplier of a fiscal stimulus, while raising the degree of deficitfinancing for these transfers also helps. However, precise targeting is much more important under the AM-PF regime than the question of financing, while the opposite is the case with a PM-AF policy mix: then deficit-spending is crucial for the size of the multiplier, and targeting matters less. Under the PM-AF regime fiscal stimulus entails a real exchange rate depreciation which might offset "import leakage" by stimulating net exports, if the share of hand-to-mouth households is low and trade is price elastic enough. Therefore, a PM-AF policy mix might break the Mundell-Fleming prediction that open economies have smaller fiscal multipliers relative to closed economies. Weak Wage Recovery and Precautionary Motives after a Credit Crunch During the economic recovery following the financial crisis many advanced economies saw subdued wage dynamics, in spite of falling unemployment and an increasingly tight labour market. We propose a mechanism which can account for this puzzle and work against usual aggregate demand channels. In a heterogeneous agent model with incomplete markets we endogenize uninsurable idiosyncratic risk through search-and-matching (SAM) frictions in the labour market. In this setting, apart from the usual precautionary saving behaviour, households can self-insure also by settling for lower wages in order to secure a job and thereby avoid becoming borrowing constrained. This channel is especially pronounced for asset-poor agents, already close to the constraint. We introduce a credit crunch into this framework modelled as a gradual tightening of the borrowing constraint (and utilizing a continuous time approach, known as HACT). The perfect foresight transition dynamics feature falling wages despite a tightening labour market and expanding employment. As households suddenly find themselves closer to the borrowing constraint, the increased precautionary motive drives them to accept lower wages in the bargaining process, while firms respond to this by posting more vacancies, leading to a tighter labour market and falling unemployment. If the household deleveraging pressure is persistent enough after the credit crunch, it can explain the weak wage recovery in spite of already stronger aggregate demand.
Essays On Monetary Fiscal And Macroprudential Policy Nexus In Indonesia
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Author : Danny Hermawan Adiwibowo
language : en
Publisher:
Release Date : 2014
Essays On Monetary Fiscal And Macroprudential Policy Nexus In Indonesia written by Danny Hermawan Adiwibowo and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2014 with categories.
Credit/GDP to avoid the buildup of excessive risks, macro prudential policies become quantitatively more important. The second chapter based on premise that monetary policy has played a prominent stabilization role in many countries during the global financial crises, but fiscal policy has been seen as either sub-optimal or less effective. There has been renewed interest in fiscal policy in small open economies such as the UK and European periphery where austerity took place amidst low inflation and accompanied by internal or external imbalances. In an emerging economy, a larger expected share of nonRicardian agents and extent of real and nominal rigidities would be expected to create a larger potential role for fiscal policy in macro-economic stabilization and strengthening the resilience of the economy. Since we focused on monetary and fiscal policy only, there is no financial friction here but instead we developed a small open economy model. The model is estimated for the Indonesian economy, using a Bayesian approach to explore the role of fiscal policy in the existence of nonRicardian households. The model also features sticky prices and wages, nonRicardian agents and tax distortions to explore (i) the potential role for fiscal policy in stabilization, and (ii) monetary policy and fiscal policy interaction more generally. We found that fiscal policy does contribute to macroeconomic stabilization in Indonesia with its countercyclical policy in terms of fiscal expenditure and a tax response to debt that ensures solvency. However, fiscal policy should thanks to a large estimated share of nonRicardians households because they create an important role for fiscal policy, while price and wage rigidities and distortionary taxes are not. The fiscal debt also plays an important shock absorber role, allowing active fiscal stabilization and absorption of exchange rate valuation effects on the stocks of debt and reserves. In the third chapter, we assessed the problem of large and persistent global imbalances in the recent years that have changed the behavior of capital flows across countries, particularly in the emerging market. After the global financial crisis in the late 2000s, the emerging market has experienced massive capital inflows due to the strong countercyclical policy in the advanced economy. These inflows lead to excessive credit growth and booms in asset prices in the emerging market, including Indonesia. In general, this massive global financial cycle has amplified the business cycle and one of the option to deal with the so-called enhanced trillema is focus on the excessive leverage and credit growth as well as some forms of capital control such as tax on non-core liabilities. Therefore, in this chapter, we combine the model from the first and second chapters, mainly the macro prudential policy and non Ricardian households issue, and develop a New-Keynesian DSGE model for a small open economy, and estimate it for the Indonesian economy. The parameter estimation process uses Bayesian approach to explore the role of macro prudential policy and tax in non-core liabilities as one form of the capital control policy. Therefore, with those policy options, this research explores the potential role of each policy to mitigate the massive amplification of the domestic business cycle and finding an optimal policy choice c 2014 Danny Hermawan Adiwibowo ALL RIGHTS RESERVED.
Essays On Dynamic Implications Of Fiscal And Monetary Policies In Small Open Economies
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Author : Amartya Lahiri
language : en
Publisher:
Release Date : 1995
Essays On Dynamic Implications Of Fiscal And Monetary Policies In Small Open Economies written by Amartya Lahiri and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 1995 with Monetary policy categories.
Essays On Monetary Policy In Small Open Economies
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Author : Gennady Lyakir
language : en
Publisher:
Release Date : 2008
Essays On Monetary Policy In Small Open Economies written by Gennady Lyakir and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2008 with categories.
Essays On Fiscal Policy Issues In Small Open Economies
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Author : Sekar Utami Setiastuti
language : en
Publisher:
Release Date : 2018
Essays On Fiscal Policy Issues In Small Open Economies written by Sekar Utami Setiastuti and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2018 with categories.
Three Essays On Monetary Policy In Small Open Economies
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Author : Kai L. Chan
language : en
Publisher:
Release Date : 2008
Three Essays On Monetary Policy In Small Open Economies written by Kai L. Chan and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2008 with Monetary policy categories.
In the second chapter, a model with nominal wage rigidities is combined with the assumption that all goods are traded in the new open economy framework to derive an outcome where the home country has a strong bias towards its own good. Then it is shown that, under broad assumptions of the parameters of the model, overshooting is a consequence when interest elasticity of money demand is less than unity.
Essays On Fiscal And Monetary Policy In Open Economies
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Author : Ayse Zeyneti Kabukcuoglu
language : en
Publisher:
Release Date : 2013
Essays On Fiscal And Monetary Policy In Open Economies written by Ayse Zeyneti Kabukcuoglu and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2013 with categories.
In the first chapter, I quantify the welfare effect of eliminating the U.S. capital income tax under international financial integration. I employ a two-country, heterogeneous-agent incomplete markets model calibrated to represent the U.S. and the rest of the world. Short-run and long-run factor price dynamics are key: after the tax reform, post-tax interest rate increases less under financial openness relative to autarky. Therefore the wealth-rich households gain less. Post-tax wages also fall less, so the wealth-poor are hurt less. Hence, the fraction in favor of the reform increases, although the majority still prefers the status quo. Aggregate welfare effect to the U.S. is a permanent 0.2 % consumption equivalent loss under financial openness which is 85.5 % smaller than the welfare loss under autarky. The second chapter aims to answer two questions: What helps forecast U.S. inflation? What causes the observed changes in the predictive ability of variables commonly used in forecasting US inflation? In macroeconomic analysis and inflation forecasting, the traditional Phillips curve has been widely used to exploit the empirical relationship between inflation and domestic economic activity. Atkeson and Ohanian (2001), among others, cast doubt on the performance of Phillips curve-based forecasts of U.S. inflation relative to naive forecasts. This indicates a difficulty for policy-making and private sectorâs long term nominal commitments which depend on inflation expectations. The literature suggests globalization may be one reason for this phenomenon. To test this, we evaluate the forecasting ability of global slack measures under an open economy Phillips curve. The results are very sensitive to measures of inflation, forecast horizons and estimation samples. We find however, terms of trade gap, measured as HP-filtered terms of trade, is a good and robust variable to forecast U.S. inflation. Moreover, our forecasts based on the simulated data from a workhorse new open economy macro (NOEM) model indicate that better monetary policy and good luck (i.e. a remarkably benign sample of economic shocks) can account for the empirical observations on forecasting accuracy, while globalization plays a secondary role.
Three Essays On Monetary Policy In A Small Open Economy
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Author : Sarbari Banerjee-Rothe
language : en
Publisher:
Release Date : 2001
Three Essays On Monetary Policy In A Small Open Economy written by Sarbari Banerjee-Rothe and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2001 with categories.
Essays On Small Open Economy Macroeconomics
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Author :
language : en
Publisher:
Release Date : 2014
Essays On Small Open Economy Macroeconomics written by and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2014 with categories.
In Chapter 1, using panel structural VAR analysis with quarterly data from six emerging Latin American countries, we document that the effects of government spending shocks depend on the share of public debt denominated in foreign currency. We find that the ratio of public debt denominated in foreign currency is a critical determinant of the real exchange rate responses. Economies with larger exposure to the foreign currency denominated public debt (HFC) responds with a real exchange rate depreciation to an increase in government consumption expenditure, while economies with a lower ratio (LFC) respond with real exchange rate appreciation. Correspondingly, the debt-to-GDP ratio in the HFC group increases faster in response to government spending shocks. Moreover, a rise in government spending increases private consumption more significantly in the HFC group. We find that government spending shocks raise output and consumption regardless of the currency denomination of debt. Moreover, the fiscal multipliers in both two groups are above one. To offer a theoretical explanation of these observed patterns, in Chapter 2 we develop a simple small open economy version of New Keynesian Open Economy Model (NOEM) and compare two model specifications which differ in the assumption about the currency denomination of debt: a foreign-currency bond economy (FB) and a domestic-currency bond economy (DB). In the FB (DB) economy, all debt is issued in foreign (domestic) currency. Comparing these two extreme assumptions allows us to shed light on the role of currency denomination of debt in explaining the cross-country variations in the effects of government spending shocks. We show that our proposed model can replicate the empirical findings documented in Chapter 1. A novel feature of our model is that the country-specific risk premium is positively correlated with the expected exchange rate depreciation, and the correlation parameter depends on currency denomination of debt. We discuss how our modification of risk premium makes the real exchange determined by two competing forces and under what conditions a real depreciation can be generated. In Chapter 3, we propose a generalized model in which both types of debt coexist and the ratio of foreign currency debt endogenously determines the strength of exchange rate depreciation mechanism. The model is shown to replicate well the observed responses of macroeconomic variables to an increase in government spending.