This thesis contains four chapters. The first chapter establishes a negative empirical correlation between the share of employees working under a temporary contract and the share of employees with high educational attainments employed in jobs for which they are overqualified. Subsequently, I show that a search and matching model with heterogeneous jobs and workers with directed search can explain this correlation. Temporary contracts induce entrepreneurs to post, in relative terms, more vacancies for jobs with low educational requirements thus reducing the time (cost) of finding one such job. As a result, some unemployed agents with high educational levels that were previously looking for a job that matched their level of formation may find it attractive to switch and start searching for one such easy to find job for which they are over-qualified. The second chapter compares the magnitude of fiscal multipliers at the zero lower bound in New Keynesian models with those that arise from a large-scale global semi-structural model (NiGEM). I find that, in NiGEM, once I impose the zero lower bound constraint, multipliers increase, as the literature predicts, but by a much smaller factor than in New Keynesian models. Whereas New Keynesian models predict multipliers well above one, or even larger than two, multipliers in NiGEM remain below one. All of the channels, highlighted by the literature, through which the zero lower bound operates to generate multipliers larger than one are operating in NiGEM but one. Contrary to the predictions of open economy New Keynesian models, a fiscal expansionary shock when the economy is stuck at the zero lower bound does not crowd in foreign demand for home goods in NiGEM. In addition, I also find that the results are sensitive to the degree of expectational myopia. Once I modify NiGEM to reduce the degree of expectational myopia and produce a foreign demand crowd in effect, I obtain that the predictions of the model become more in line with those of the New Keynesian literature. The third chapter describes the cyclical behavior of the relative price of investment using three different measures: instantaneous correlations on data detrended using the HodrickPrescott filter, correlations on VAR forecast errors and instantaneous correlations on frequencydomain filtered data. All three measures suggest that the relative price of equipment goods is countercyclical. Instead, the relative price of household and total private investment is countercyclical according to the correlations computed on VAR forecast errors and frequencydomain filtered data while correlations on data detrended using the Hodrick-Prescott filter suggest that the relative price of household and total private investment is procyclical. The fourth chapter reviews the theoretical and empirical literature on macroprudential policies and tools and tests empirically the effectiveness of several macroprudential policies and tools. We find evidence that macroprudential polices are effective at curbing house price and credit growth, albeit some tools are more effective than others. These include, in particular, taxes on financial institutions and strict loan-to-value and debt-to-income ratio limits.

Broadly, the first two chapters analyse two novel sources of economic fluctuations, and the last chapter quantifies how the traditional monetary policy tradeoffs is affected by a mandate to stabilise financial variables. The first chapter focuses on the macroeconomic effects by variations in the range of available goods produced. Previous work that analysed the real effects of financial shocks only considered the effect on the production of existing goods. Firms can also invest into production lines of new goods. A credit contraction reduce investment into new products, leading to lower competition and higher markups. This decreases consumption demand, as well as lowering labour demand and wages, reducing household income. This amplifies the response of consumption to financial shocks (19% more volatile). The DSGE model is able to match the VAR impulse responses on the predicted channels. The second chapter resurrects the question if improved business practices contributed to the Great Moderation. While previous studies only examine inventory management, we analyse the role of supply chain management on enhancing production coordination across firms. VAR counterfactuals suggest that improved business practices have dampened order volatility by 40-50%. We therefore determine that better business practices contributed a significant 20-25% of the Great Moderation. The third chapter shows how a policy of ‘leaning against the wind’ affects the traditional monetary policy tradeoff. An estimated, modified Gertler and Karadi (2011) model is used to compute optimal monetary policy under commitment for a range of central bank objectives. The main findings are that increased regard for financial variables: (a) makes price stability increasingly costly in terms of output stabilisation; (b) raises the cost of output and inflation volatility, in reducing financial volatility; (c) depend crucially on the underlying disturbance, and on the financial variable that policy aims to stabilise.

The aim of this study is to present four essays related to the macroeconometric modelling of specific relations within the economy of the United Kingdom for the period 1992-2012. The focal point of these essays is the link between inflation targeting monetary policy decision making and housing or financial prices. In particular, we investigate whether traditional channels of monetary policy are still in effect under the adopted monetary policy regime. At the same time, findings associated with the specific relation between both asset markets or with the various working assumptions which facilitate our investigation are also reported. The specific econometric methods employed include the development of structural vector autoregressive (SVAR), Markov regime-switching, as well as, multivariate generalised autoregressive conditionally heteroskedastic (MGARCH) models. The formulation of these models is predicated upon the selection of appropriate approximations for all financial and macroeconomic indicators of interest. The main findings of the first essay suggest that under the inflation targeting monetary policy regime, innovations in the monetary policy instrument have no direct effect on the stock market as previously suggested by traditional channels of monetary policy. The said innovations though, appear to have a significant negative impact on the housing market. Furthermore, variation in the stock market can be explained by innovations in the housing market. Turning to the second essay, prominent among our results is the fact that innovations in fiscal policy have a significantly negative effect on the stock market (direct impact). In addition, the effects of monetary policy on the stock market also become negative (indirect impact). According to the third essay when both the stock and the housing market are in a highly volatile regime, then contractionary monetary policy pushes both markets to remain at that regime. Finally, the main outcome from the fourth essay is that the time-varying correlation between monetary policy and housing or financial prices becomes stronger during turbulent times. Overall, our findings suggest that within an inflation targeting monetary policy regime the effects of monetary policy decisions on the stock market strongly depend on the broader economic conditions. By contrast, traditional monetary policy channels with respect to the housing market appear to be in effect; however, broader economic conditions have a key role to play in this case as well.

The thesis contains three chapters. The first chapter studies optimal fiscal policy in a small open economy in the presence of sovereign default risk. In particular, it studies this topic in an environment characterized by asymmetric information where financial markets (lenders) do not have enough information about the creditworthiness of the government (borrower). The chapter investigates whether the asymmetric information environment justifies the implementation of fiscal austerity during a recession, as opposed to the standard countercyclical response. The main finding is that fiscal austerity is the optimal fiscal policy during a recession. Fiscal austerity, although detrimental to economic growth, benefits the economy providing a signal to financial markets about the creditworthiness of the government and reducing borrowing costs. When the inherited government debt-to-GDP ratio is high, this beneficial effect of fiscal austerity outweighs the costs of the policy even when fiscal austerity has a strong negative impact on economic activity, i.e. when the fiscal multiplier is larger than one. The findings of this chapter are useful to shed new light on the fiscal policy developments across Europe during the European debt crisis. The second chapter of the thesis, co-authored with Maria Grazia Attinasi (ECB), studies empirically the effect of fiscal consolidation on the debt-to-GDP ratio for the Euro area countries, using a quarterly panel fiscal VAR. The main finding of this chapter is that following a fiscal consolidation episode, the debt-to-GDP ratio increases initially, for a period up to four quarters, and then starts to decline. The size and length of the initial debt increase depend on the composition of consolidation. In the case of revenue-based consolidations the increase in the debt-to-GDP ratio tends to be larger and to last longer than in the case of spending-based consolidations. The composition also matters for the long term effects of fiscal consolidations. Spending-based consolidations tend to generate a durable reduction of the debt-to-GDP ratio compared to the pre-shock level, whereas revenue-based consolidations do not produce any lasting improvement in the sustainability prospects as the debt-to-GDP ratio tends to revert to the pre-shock level. The findings of this chapter are of particular policy relevance in the context of the ongoing debate about the merits of fiscal consolidation as the main tool to restore debt sustainability in the Euro area countries. They suggest that short term considerations related to the detrimental impact of consolidation on growth and on the debt-to-GDP ratio need to be weighed against the long term benefits of a rebound in output growth and a durable reduction in the debt-to-GDP ratio. The third chapter, co-authored with Daniela Bragoli (Catholic University) and Michele Modugno (Federal Reserve Board), compares the forecasting performance of GDP now-casting techniques through a dynamic factor model to the forecasts produced by the Central Bank of Brazil, which is the only central bank that collects predictions at a daily frequency. Results indicate that the Central Bank of Brazil forecasts perform as well as model based forecasts. The latter finding suggests that, on the one hand, judgemental forecasters do not have computational limitations and they are able to incorporate quickly new information in a way that is almost as efficient as a machine. On the other hand, it shows that a linear time invariant model does a slightly better job in now-casting Brazilian GDP and hence that eventual non linearities, time variations and soft information that could be incorporated by judgement, do not provide new important information.

This thesis evaluates different specifications of non-linear time series models applied to macroeconomic problems. The evaluations investigate whether linear models are a good representation of the data, and which non-linear specifications are comparatively better in three different applications. In addition, the implications of the evaluation to the understanding of macroeconomic problems and to economic predictions are analysed. The first evaluation concerns univariate non-linear time series models aimed at reproducing the asymmetries of the business cycles. Using business cycle stylised facts and conditional mean functions and surfaces, the results support the use of non-linear models that can generate a three-phase cycle as the specification that can reproduce all the business cycle features, including the asymmetries in the shape of the cycle. The second assessment is of models that characterise the non-linearities of the US term structure of interest rates. The forecast evaluation of different specifications of threshold vector equilibrium correction models, which are estimated for long- and short-term interest rates and their spread, shows that the inclusion of non-linearity improves short-horizon forecasts. However, when compared with AR models, the gains from nonlinearity only occur when the predictions for the spread are evaluated at long horizons. The third assessment concerns non-linear bivariate systems that account for the effect of non-linearities and/or structural breaks when the spread is employed as leading indicator. Different specifications are evaluated using their prediction of the probability of two definitions of recessions. Models with non-linearities and structural breaks perform better at predicting the probability of recession than linear models and models with only non-linearity or structural break. The results of the evaluation of univariate time series models improve the understanding of the connection between these models and business cycle asymmetries. The winner of the forecast competition of bivariate systems of interest rates and their spread indicates that the expectation theory of the term structure of interest only holds for the period in which the spread is negative, even though the spread can predict changes in the long-term rate in a specific state. In addition, the result that structural breaks and non-linearities are important to predict US recessions when the spread is the leading indicator changes the timing of a predicted recession for 2001.

I present a thesis in three chapters on the topics of Macroeconomics and Finance. In the first chapter, I study the ex ante effects of the fear of future financial crises. Crises are modelled through multiple equilibria driven by a self-fulfilling fall in asset prices. I study the effects of allowing agents to anticipate such an event. In a financial crisis, capital is pushed away from experts and towards less productive households, worsening the allocation of capital. Anticipation of this lowers asset prices, investment, and growth today, even if experts are currently well enough capitalised to survive a crisis. The possibility of future crises also creates a state-dependent“financial crisis accelerator” which can amplify business-cycle shocks. In the model, prudential policy can simultaneously increase growth and stabilise the economy, in contrast with common arguments that prudential policy should decrease growth. In the second chapter, I present evidence that countries which experienced greater declines in total factor productivity (TFP) during the Great Recession experienced milder contractions in hours worked. Thus I show that there is a tension between the crisis manifesting itself either as a problem with productivity or with labour markets. Additionally, countries with larger falls in real wages tend to be those with TFP, and not labour market, problems. Inspired by these facts, I build a model of sticky wages, and prove that wage adjustment determines the extent to which a financial crisis leads to declines in TFP or hours worked. Larger falls in real wages protect labour markets from reductions in hours. However, lower real wages reduce the incentive to reallocate resources across firms during the crisis, leading to larger declines in productivity. In the final chapter, I introduce financial frictions into the labour market matching model, and study interactions between the two frictions. I demonstrate a feedback between asset and labour markets which amplifies the model’s response to exogenous shocks. Shocks which increase equity holders’ net worth allow them to fund more vacancies, raising market tightness and lowering the ease with which firms can hire workers. This increases the value of being an existing firm, causing stock prices to appreciate. This increases experts’ net worth further, amplifying the initial shock in a mechanism akin to the traditional financial accelerator. I derive an arbitrage equation in my model similar to the standard free entry condition. I show that any matching model which possesses this arbitrage equation, including the standard matching model, is able to match 82% of the volatility in US market tightness if calibrated to match the volatility in asset prices.

This thesis represents largely the two sides to both theory and econometrics of dynamic macroeconomics, namely stationary and non-stationary models and data. The stationary part concludes with Chapter 3 and in Chapter 4, I look at the non-stationary side. More speci�cally, I preview the thesis in Chapter 1 highlighting the modelling and econometric approaches commonly found in the economics literature; also I report some key results. In Chapter 2, I provide a comprehensive, but certainly far from being exhaus- tive, review of the literature dating back to the publication of Stanley Jevon�s (1866) The Coal Question, but with the main discussion beginning with Harold Hotelling�s (1931) The Economics of Exhaustible Resources. I develop a two-sector open economy extension to the Kydland and Prescott (1982), Long and Plosser (1983) and Kim and Loungani (1992) models in Chapter 3 and estimate it on H-P �ltered annual U.S. data covering 64 years, with the main purpose of discovering how energy price along with other supply-side and demand-side shocks (imported and domestic) impacts on the U.S. economy. The model presented only contains the current account and I restrict trade to balance in every pe- riod. I �nd that model �ts the data for my benchmark variables of interest in the auxiliary model: output, real exchange rate, energy use, and consumption. When more variables and in particular sectoral variables are added, meanwhile, to the auxiliary model, I �nd that the model�s performance especially as it relates to this estimated model parameters did not �t. What I take from this is that the estimated structural parameters are not globally applicable within this economic environment. This model is then further extended by including the capital account in Chapter 4 before re-estimation, but now also on non-stationary data, which I suppose is more repre- sentative of reality. I focus on the �t of the model to output and the economy�s measure i of competitiveness: the real exchange rate. I �nd that the energy price and technology shocks have major e¤ects on the U.S. output and relative competitiveness. The mecha- nisms by which these e¤ects are transmitted are two-fold. First is via the terms of trade occurring as a resource drain on the economy as the U.S. would need to �nd extra resource to commit to the import of crude oil. The second is via household�s reduced investment activity. Both channels can be explained by the fact that the substitution away from oil is happening at too slow a pace because of low estimated elasticities parameters. This agrees with Hamilton who argued that oil shock works via demand contraction. I have in this thesis veri�ed his conjecture via a well-motivated and detailed microfounded dynamic stochastic general equilibrium (DSGE) model. Finally, I review the thesis speculating on possible future extensions in Chapter 5.

The thesis investigates how firm entry and exit into industry influences macroeconomic productivity. The first contribution is to show that firm entry and exit dynamics cause endogenous productivity movements over the business cycle due to the slow response of incumbent firms to macroeconomic conditions. The second contribution is to show that these productivity effects persist into the long run because of firm dynamics’ effect on industry competition. Therefore the thesis argues that slow firm responses cause amplified productivity effects in the short run and that these effects can persist into the long run. A key distinction of the research is to develop an analytically tractable dynamic general equilibrium model. This provides a precise explanation of productivity movements, without using numerical simulation. A crucial feature of the modelling is that firm dynamics have a time-to-build lag, so entry and exit are noninstantaneous. This causes a short-run period during which shocks to the economy are borne by inert incumbent firms and this is responsible for amplified short-run productivity effects. However, over time firms are able to enter and exit which ameliorates the amplification effect. Thus this process alone does not explain persistent effects on productivity. In order to understand persistent effects, the thesis explains that one must consider the effect of entry and exit on the competitive pressure of incumbents. When this is taken into account it shows that firms change their pricing behaviour in response to entry and exit, and the result is that long-run pricing markups change which in turn affect long-run productivity. Chapter 1 demonstrates the empirical relevance of the relationship between productivity, firm entry and output in US data. Chapter 2 develops a structural model to explain shortrun movements in productivity and firm dynamics. Developing chapter 2, chapter 3 explains the long-run effect of firm dynamics on productivity through entry’s effect on competition.

This thesis is concerned with macroeconomic dynamics under various forms of uncertainty. Chapter 2 recognizes that the information flow from the interest rate is impeded when the nominal interest rate hits the zero lower bound. This impediment can (a) increase the duration of zero lower bound episodes and (b) bring about more persistent deflationary pressure. Moreover, it can make the exit from the zero lower bound disorderly. Chapters 3 and 4 are concerned with dynamics of aggregate variables under Knightian Uncertainty. To overcome difficulties with expectations formation under Knightian Uncertainty, the agents follow Interactive Trial and Error Learning (ITEL) (Young, 2009; Pradelski and Young, 2012) to choose investment portfolios. This involves learning by occasionally experimenting with new actions even when the current action proves to be good. Two applications of ITEL are presented. Chapter 3 deals with the growth of aggregate variables. The growth model can match several business cycle features of the US real aggregate wealth data. Chapter 4 considers a portfolio choice problem. The portfolio choice model can match the first two moments of the US real excess return of equity over bonds almost perfectly. Chapter 5 explores “This Time Is Different Syndrome” of Reinhart and Rogoff (2009) in a setting where the agents are learning under Knightian Uncertainty. The agents are grouped into different generations and their models compete in terms of forecasting power. The predecessor’s model is discarded together with the data set when its forecasting power is worse than the current generation’s model. This loss of relevant data is rooted in focusing only on forecasting well in the short-run. By shifting the weight towards finding the true model of the economy, this problem can be substantially reduced.

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