iv Abstract This thesis investigates the effects of government spend- ing on aggregate economic variables in the Czech Republic. The standard RBC and New Keynesian models assume only forward-looking households despite the evidence of a sig- nificant fraction of non-optimizing households. These mod- els do not provide reasonable predictions for the response of consumption: both models predict its fall following a gov- ernment spending shock. Therefore, a variant of the New Keynesian model, where rule-of-thumb households coexist with optimizing households, is used for the analysis. We have found that fiscal policy has a positive impact on output, although government spending multiplier does not exceed one. Also, the impact on consumption is positive for several periods following a fiscal spending shock, which is consistent with the evidence. JEL Classification: C32, E32, E62 Keywords: fiscal policy, fiscal multipliers, fiscal VAR, rule- of-thumb consumers

This dissertation consists of three essays on housing markets and monetary policy. The first essay focuses on the impact of monetary policy on U.S. local housing markets and finds that monetary policy has uneven impacts on local housing markets, and that the magnitude of the impacts are correlated with housing supply regulations. The second essay studies the optimal interest rate rule in a DSGE model with housing market spillovers and finds that the optimal interest rate rule responds to house price inflation even when the stabilization of house price is not among the objectives of the policymaker. The third essay is the core of this dissertation. I construct a dynamic stochastic general equilibrium (DSGE) model in this paper to study the fluctuations in the U.S. housing markets. The model features a market for newly built houses, a secondary market for old houses, and an endogenous term structure of nominal interest rates. Negative technological progress in the housing sector explains the upward trend in house prices over the past four decades. Housing preference and technology innovations explain about 80% of the volatility of housing investment, real price of new houses, and the old-to-new house price ratio. Monetary factors explain about 15% of the volatility of housing investment, but do not significantly contribute to the price fluctuations of either new or old houses. The preference innovation to old houses is the leading determinant of the run-up in the price of old houses relative to the price of new houses during the 10-year period before the Great Recession. The term structure is endogenous in this paper, and the intertemporal preference innovation makes a non-negligible contribution to the variations in nominal interest rates. Housing market conditions do not contribute much to the fluctuations of interest rates, but significantly affect the shape of the yield curve. / Ph. D.

After the recent financial crisis of 2007, a connection between monetary policy and financial stability has started to be thoroughly investigated. One of the particular areas of this research field deals with the role of various financial variables in the monetary policy rules. The main purpose of this research is to find whether direct incorporation of the financial variables in the monetary policy rule can bring macroeconomic benefits in terms of lower volatility of inflation and output. So far, the main emphasis of the research has been placed on the investigation of the augmented Taylor rules in the context of a closed economy. This thesis sheds light on the performance of the augmented Taylor rules in a small open economy. For this purpose, a New Keynesian DSGE model with two types of financial frictions is constructed. The model is calibrated for the Czech Republic. The thesis provides four conclusions. First, incorporation of the financial variables (asset prices and the volume of credit) in the monetary policy rule is beneficial for macroeconomic stabilization in terms of lower implied volatilities of inflation and output. Second, the usefulness of the augmented monetary policy rule is the most apparent in case of the shock originating abroad. Third, there is a strong link between the financial and the...

This Thesis is composed by three independent papers that investigate central debates in empirical macroeconomic modeling. Chapter 1, entitled “A Model for Real-Time Data Assessment with an Application to GDP Growth Rates”, provides a model for the data revisions of macroeconomic variables that distinguishes between rational expectation updates and noise corrections. Thus, the model encompasses the two polar views regarding the publication process of statistical agencies: noise versus news. Most of the studies previous studies that analyze data revisions are based on the classical noise and news regression approach introduced by Mankiew, Runkle and Shapiro (1984). The problem is that the statistical tests available do not formulate both extreme hypotheses as collectively exhaustive, as recognized by Aruoba (2008). That is, it would be possible to reject or accept both of them simultaneously. In turn, the model for the DPP presented here allows for the simultaneous presence of both noise and news. While the “regression approach” followed by Faust et al. (2005), along the lines of Mankiew et al. (1984), identifies noise in the preliminary figures, it is not possible for them to quantify it, as done by our model. The second and third chapters acknowledge the possibility that macroeconomic data is measured with errors, but the approach followed to model the missmeasurement is extremely stylized and does not capture the complexity of the revision process that we describe in the first chapter. Chapter 2, entitled “Revisiting the Success of the RBC model”, proposes the use of dynamic factor models as an alternative to the VAR based tools for the empirical validation of dynamic stochastic general equilibrium (DSGE) theories. Along the lines of Giannone et al. (2006), we use the state-space parameterisation of the factor models proposed by Forni et al. (2007) as a competitive benchmark that is able to capture weak statistical restrictions that DSGE models impose on the data. Our empirical illustration compares the out-of-sample forecasting performance of a simple RBC model augmented with a serially correlated noise component against several specifications belonging to classes of dynamic factor and VAR models. Although the performance of the RBC model is comparable to that of the reduced form models, a formal test of predictive accuracy reveals that the weak restrictions are more useful at forecasting than the strong behavioral assumptions imposed by the microfoundations in the model economy. The last chapter, “What are Shocks Capturing in DSGE modeling”, contributes to current debates on the use and interpretation of larger DSGE models. Recent tendency in academic work and at central banks is to develop and estimate large DSGE models for policy analysis and forecasting. These models typically have many shocks (e.g. Smets and Wouters, 2003 and Adolfson, Laseen, Linde and Villani, 2005). On the other hand, empirical studies point out that few large shocks are sufficient to capture the covariance structure of macro data (Giannone, Reichlin and Sala, 2005, Uhlig, 2004). In this Chapter, we propose to reconcile both views by considering an alternative DSGE estimation approach which models explicitly the statistical agency along the lines of Sargent (1989). This enables us to distinguish whether the exogenous shocks in DSGE modeling are structural or instead serve the purpose of fitting the data in presence of misspecification and measurement problems. When applied to the original Smets and Wouters (2007) model, we find that the explanatory power of the structural shocks decreases at high frequencies. This allows us to back out a smoother measure of the natural output gap than that resulting from the original specification.

In the aftermath of the recent financial crisis, an environment of historically low interest rates and extensive household indebtedness in the OECD countries have triggered a vivid debate on whether central banks should react to house price fluctuations in their pursuit of monetary policy. In Sweden, a period of low policy rates and house price inflation was halted when the central bank increased the interest rates in 2010. This paper studies whether the Riksbank reacted to house prices in 1993-2013. Using Bayesian methods and quarterly data, I estimate a DSGE model with patient and impatient households, where the central bank reacts to house price inflation. The results suggest that the Riksbank did respond to house prices during the sample period. The findings are robust and plausible from an economic point of view.

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.

[pt] Esta tese consiste de três ensaios sobre política monetária. O primeiro investiga o problema de endogeneidade relacionado a estimação de regras de política monetária. O estimador de Mínimos Quadrados Ordinários gera estimativas viesadas e inconsistentes devido ao problema de endogeneidade. O uso de Método Generalizados dos Momentos (MGM) tem sido defendido como uma maneira eficiente de eliminar o viés. Nós usamos um modelo Novo Keynesiano de três equações para mostrar analiticamente que o viés de endogeneidade é uma função da fração da variância das variáveis contabilizadas pelo choque monetário. Se os choques monetários explicam apenas uma pequena fração das variações da inflação e do hiato do produto, então o viés de endogeneidade é pequeno. Nós então usamos métodos de Monte Carlo para mostrar que este resultado sobrevive em modelos econômicos mais complexos. No segundo artigo nós estimamos um modelo dinâmico estocástico de equilíbrio geral para avaliar os efeitos de forward guidance em um ambiente em que o prêmio de risco varia no tempo. Nós avaliamos os efeitos de forward guidance sobre a curva de juros e documentamos como choques de news impactam as variáveis macroeconômicas. Os resultados mostram que forward guidance tem impacto limitado na macroeconomia. Além disso, nossos resultados sugerem que o forward guidance puzzle não pode ser eliminado mesmo em um ambiente no qual forward guidance tem papel limitado nas taxas de juros mais longas. O terceiro artigo explora informações das variações dos juros para identificar choques monetários de news em um modelo macro-financeiro dinâmico. Nós permitimos variação no prêmio de risco e correlação entre os choques de news em um modelo restrito à taxa nominal de juros igual a zero. Apresentamos evidências de que o uso de métodos de máxima verossimilhança, combinado com modelos dinâmicos, não é suficiente para identificar os choques de news. Esta falha está associada com a ausência de mecanismos mais sofisticados para lidar com os movimentos da curva de juros durante o período recente de recessão econômica. / [en] This thesis consists of three essays on monetary policy. The first investigates the endogeneity problem related to monetary policy rules estimation. Ordinary Least Square estimator generates biased and inconsistent estimates due to endogeneity. Generalized Method of Moments (GMM) has been used on the pretext of eliminating the bias. We show analytically in the 3-equation New Keynesian model that the asymptotic bias is a function of the fraction of the variance of variables accounted for by monetary policy shocks. Since the monetary policy shocks explain only a small fraction of inflation and the output gap, hence, the endogeneity bias is small. We use Monte Carlo methods to show that this result survives in larger DSGE models. In the second article we estimate a medium-scale DSGE model to assess the effects of forward guidance in a framework with endogenous time-varying price of risk. We investigate how the forward guidance impact the term structure of interest rates, and document how different monetary policy news can impact macroeconomic variables. We find that forward guidance, through isolated news shocks, has limited impact on long term rates. Also, anticipated and surprise shocks have similar effects on bond yields as the economy is not restricted by the ZLB. Further, our results suggest that the forward guidance puzzle cannot be eliminated even within a framework in which forward guidance has limited impact on long term rates. The third essay exploits information from changes in yield curve to identify monetary news shocks in a macro-financial DSGE model. We allow a timevarying term premium and zero lower bound (ZLB) constraints. Although the DSGE econometric literature has argued in favor of the likelihood-based methods to identify and estimate the anticipated components of exogenous innovations, we show evidence that this approach, in combination with a standard New Keynesian DSGE model, does not provide a satisfactory estimation of the recent course of forward guidance shocks. This failure is associated with the absence of a richer mechanism to deal with the yield curve in the the recent recession.

<p>This dissertation is the collection of three essays aimed to evaluate the empirical performance of dynamic stochastic general equilibrium (DSGE) models in explaining the behavior of macroeconomic dynamics in emerging countries. </p><p>Chapter 1, which is joint work with M. Uribe and R. Pancrazzi, investigates the hypothesis that a real business cycles model driven by permanent and transitory productivity shocks can explain well observed business-cycle fluctuations in emerging countries. The model is estimated using more than a century of Argentine data. </p><p>In Chapter 2, a comprehensive real DSGE model of an emerging country is estimated using Bayesian techniques, expanding the data set used in Chapter 1. The goal is to characterize the relative relevance of ten different business cycles' drivers: three sectorial technology shocks, embodied and disembodied non-stationary technology, terms of trade, the world interest rate, trade policy, government expenditures and the country premium. </p><p>Finally, Chapter 3 estimates (using Mexican data) a DSGE model of an emerging country containing many frictions, as has been recently argued, that impose non-trivial constraints for monetary-policy design. In particular, the framework features a sectorial decomposition of the productive sector, intermediate inputs, imperfect pass-through, endogenous premium to finance capital accumulation, a liability-dollarization problem, currency substitution, price and wage rigidities, and dynamics driven by eleven shocks.</p> / Dissertation

This thesis consists of four essays in empirical macroeconomics. What Are the Effects of Fiscal Policy Shocks? A VAR-Based Comparative Analysis The literature using structural vector autoregressions (SVARs) to assess the effects of fiscal policy shocks strongly disagrees on the qualitative and quantitative response of key macroeconomic variables. We find that controlling for differences in specification of the reduced-form model, all identification approaches used in the literature yield similar results regarding the effects of government spending shocks, but diverging results regarding the effects of tax shocks. The Analytics of SVARs. A Unified Framework to Measure Fiscal Multipliers Does fiscal policy stimulate output? SVARs have been used to address this question, but no stylized facts have emerged. I show that different priors about the output elasticities of tax revenue and government expenditures implied by the identification schemes generate a large dispersion in the estimates of tax and spending multipliers. I estimate fiscal multipliers consistent with prior distributions of the elasticities computed by a variety of empirical strategies. I document that in the U.S. spending multipliers are larger than the tax multipliers. Computing DSGE Models with Recursive Preferences and Stochastic Volatility This paper compares solution methods for computing the equilibrium of dynamic stochastic general equilibrium models with recursive preferences and stochastic volatility. The main finding is that a third-order perturbation is competitive in terms of accuracy with Chebyshev polynomials and value function iteration, while being an order of magnitude faster to run. Business Cycle Accounting and Misspecified DSGE Models This paper investigates how insights from the literature on business cycle accounting can be used to trace out the implications of missing channels in a baseline estimated dynamic stochastic general equilibrium model used for forecast and policy analysis.

L’interaction sphère financière/sphère réelle a longtemps été délaissée dans les modèles macroéconomiques, postulant généralement la neutralité de la première. La récente crise financière dite des subprime démontre qu’il en est autrement. Cette thèse propose trois essais sur le rôle du secteur financier et plus particulièrement bancaire à l’aune de la dernière crise.Le premier consiste à donner un cadre formel à la nature exceptionnelle de la crise en abandonnant l’hypothèse de normalité des ‘événements résiduels’. Nos résultats réfutent le caractère ‘normal’ de la crise mais, aussi et surtout, soulignent les biais en termes de diagnostics économiques à la considérer comme telle.Par ailleurs, un des effets exceptionnels de cette crise a été le recours à des politiques monétaires non conventionnelles. La deuxième partie de la thèse suggère à ce titre l’incertitude sur les marchés interbancaires comme une raison probable de l’inefficacité des politiques monétaires conventionnelles. Une politique monétaire équilibrée entre lutte contre l'inflation et soutien à l'économie réelle serait néanmoins plus à même de réduire les effets de cette incertitude sur le cycle économique.Enfin, le troisième volet de la thèse propose une étude d’impact de la nouvelle réglementation Bâle III sur le secteur réel. L’absence d’externalités positives entre la mise en œuvre de la contrainte de capitalisation et celle du LCR accentue davantage l’écart de production entre PME et grandes entreprises, induisant un impact récessif global encore plus sensible. Une mise en œuvre plus lente et parfaitement annoncée des nouvelles normes réglementaires pourrait néanmoins nuancer ces effets. / Until recently, most macroeconomic models have ignored the interaction between financial and real sectors, postulating the neutrality of the former. However, the last financial crisis, also known as subprime crisis, rejected this assumption. In this thesis we propose three essays where we try to shed light on the role of the financial and more particularly the banking sector during the last crisis.The first essay provides a formal assessment of the exceptional nature of the crisis by challenging the usual ‘normality’ assumption of the innovations. Our results refute the ‘normality’ assumption for the crisis, but also and more importantly, they put forward possible biases from using this assumption in macroeconometric models.The exceptional features of the crisis can also be seen in the use of unconventional monetary policy. The second chapter of the thesis shows how higher volatility in the interbank market impedes the standard monetary policy effects. However, a central bank with a more balanced monetary policy, reacting both to inflation pressures and to GDP variations, would be in a better situation to dampen the effects of interbank volatility shocks on the economic cycle.The last chapter deals with the impact on the real sector of the new Basel III regulatory requirements. The fulfillment of the new capital ratio has no positive spill-over effects on the Liquidity Coverage Ratio which magnifies the output discrepancy between SMEs and corporate firms. This, in turn, generates a greater recessionary impact on the overall economy. A more progressive implementation of the new regulation combined with perfect expectations should however decrease such adverse effects.