Historically, credit market conditions have been shown to impact economic activity, at times severely. For instance, in the late 2000s, the United States experienced a financial crisis that seized domestic and foreign credit markets. The ensuing lack of access to credit brought about a steep decline in output and a sluggish recovery. Accordingly, policymakers commonly take steps to mitigate the effects of adverse credit market conditions and, at times, conduct unconventional monetary policy once traditional policy tools become ineffective. This dissertation is a collection of essays regarding monetary policy, the flow of credit, financial crises, and the macroeconomy. Specifically, I describe monetary policy’s impact on the allocation of credit in the U.S. and analyze the role of upstream and downstream credit conditions and financial crises on international trade in a global supply chain. The first chapter assesses the impact of monetary policy shocks on credit reallocation and evaluates the importance of theoretical transmission mechanisms. Compustat data covering 1974 through 2017 is used to compute quarterly measures of credit flows. I find that expansionary monetary policy is associated with positive long-term credit creation and credit reallocation. These impacts are larger for long-term credit and for credit of financially constrained firms and firms that are perceived as risky to the lender. This is predicted by the balance sheet channel of monetary policy and mechanisms that reduce lenders’ risk perceptions and increase the tendency to search for yield. Furthermore, I find that, on average, the largest increases in credit creation resulting from monetary expansion are to firms that exhibit relatively low investment efficiency. These estimation results suggest that expansionary monetary policy may have a negative impact on future economic growth. The second chapter evaluates the quantitative effects of unconventional monetary policy in the late 2000s and early 2010s. This was a period when the traditional monetary policy tool (the federal funds rate) was constrained by the zero lower bound. We compute credit flow measures using Compustat data, and we employ a factor augmented vector autoregression to analyze unconventional monetary policy’s impact on the allocation of credit during the zero lower bound period. By employing policy counterfactuals, we find that unconventional monetary policy has a positive and simultaneous impact on credit creation and credit destruction and these impacts are larger in long-term credit markets. Applying this technique to analyze the flows of financially constrained and non-financially constrained borrowing firms, we find that unconventional monetary policy operates through the easing of collateral constraints because these effects are larger for small firms or those with high default probabilities. During the zero lower bound period, we also find that unconventional monetary policy brings about increases in credit creation for firms of relatively high investment efficiency. The third chapter pertains to the global trade collapse of the late 2000s. This collapse was due, in part, to strained credit markets and the vulnerability of exporters to adverse credit market conditions. The chapter evaluates the impact of upstream and downstream credit conditions and the differential effects of financial crises on bilateral trade. I find that upstream and downstream sectors’ needs for external financing is negatively associated with trade flows when the exporting or importing country’s cost of credit is high. However, I find that this effect is dampened for downstream sectors. I also find that downstream sectors’ value of collateral is positively associated with trade when the cost of credit is high in the importing country. High downstream trade credit dependence coupled with high costs of credit in the importing country also cause declines in imports. There are amplifying effects of credit costs for sectors that are highly dependent on external financing when the importing or exporting country is in financial crisis. Further, the magnitude is larger when the exporting country is in financial crisis. Finally, I find that these effects on trade flows are large when the exporting country is a developed economy, but they are muted for developing economies.

We generalize a simple New Keynesian model and show that a flattening of the Phillips curve reduces the size of fiscal multipliers at the zero lower bound (ZLB) on the nominal interest rate. The factors behind the flatting are consistent with micro- and macroeconomic empirical evidence: it is a result of, not a higher level of price rigidity, but an increase in the degree of strategic complementarity in price-setting -- invoked by the assumption of a specific instead of an economy-wide labour market, and decreasing instead of constant-returns-to-scale. In normal times, the efficacy of fiscal policy and resulting multipliers tends to be small because negative wealth effects crowd out consumption, and because monetary policy endogenously reacts to fiscally-driven increases in inflation and output by raising rates, offsetting part of the stimulus. In times of a binding ZLB and a fixed nominal rate, an increase in (expected) inflation instead lowers the real rate, leading to larger fiscal multipliers. Conditional on being in a ZLB-environment, under a flatter Phillips curve, increases in expected inflation are lower, so that fiscal multipliers at the ZLB tend to be lower. Finally, we also discuss the role of solution methods in determining the size of fiscal multipliers. / Series: Department of Economics Working Paper Series

This dissertation consists of three essays on income risk and aggregate demand over the business cycle, each addressing an aspect of the Great Recession. The first chapter reframes the standard liquidity trap model to illustrate the costly feedback loop between idiosyncratic risk and aggregate demand. I first show that a liquidity trap can result from excess demand for precautionary savings in times of high uncertainty. Second, I show that the output and welfare costs of the ensuing recession depend crucially on how the drop in demand for output is translated into a reduction in demand for labor. Increased unemployment risk compounds the original rise in idiosyncratic productivity risk and reinforces precautionary motives, deepening the recession. Third, I show that increasing social insurance can raise output and welfare at the zero bound. I decompose these effects to distinguish the component unique to the liquidity trap environment and show that social insurance is most effective at the zero bound when it targets the type of idiosyncratic risk households face, which in turns depends on the labor market adjustment mechanism. The second paper offers a novel model of the connection between the consumer credit and home mortgage markets through an individual’s credit history. This paper introduces a novel justification for the home mortgage interest deduction. In an economy with both housing assets and consumer credit, the mortgage interest deduction is modeled as a subsidy for the accumulation of collateralizable assets by households who have maintained good credit. As such, the subsidy loosens participation constraints and facilitates risk-sharing. Empirical evidence and a calibration exercise reveal that the subsidy has a sizable impact on the availability of credit. The third paper assesses the role of policy uncertainty in the Great Recession. The Great Recession features substantial geographic variation in employment losses, a fact that is often presented as a challenge to uncertainty-based models of the downturn. In this paper we show that there is a substantial correlation between the distribution of employment losses and the increases in local measures of both economic and policy uncertainty. This relationship is robust across a wide range of measures. / Economics

Submitted by João Valente (joaopaulovalente@hotmail.com) on 2013-09-21T14:35:40Z No. of bitstreams: 1 Tese_FINAL.pdf: 645576 bytes, checksum: 5dcd3933e691c9eb4d85777d7f20904f (MD5) / Approved for entry into archive by Janete de Oliveira Feitosa (janete.feitosa@fgv.br) on 2013-09-27T13:44:20Z (GMT) No. of bitstreams: 1 Tese_FINAL.pdf: 645576 bytes, checksum: 5dcd3933e691c9eb4d85777d7f20904f (MD5) / Approved for entry into archive by Marcia Bacha (marcia.bacha@fgv.br) on 2013-09-30T12:35:01Z (GMT) No. of bitstreams: 1 Tese_FINAL.pdf: 645576 bytes, checksum: 5dcd3933e691c9eb4d85777d7f20904f (MD5) / Made available in DSpace on 2013-09-30T12:35:14Z (GMT). No. of bitstreams: 1 Tese_FINAL.pdf: 645576 bytes, checksum: 5dcd3933e691c9eb4d85777d7f20904f (MD5) Previous issue date: 2013-06-19 / Neste trabalho, propusemos um modelo DSGE que busca responder algumas questões sobre políticas de afrouxamento monetário (Quantitative Easing - QE) recentemente implementadas em resposta à crise de 2008. Desenvolvemos um modelo DSGE com agentes heterogêneos e preferred-habitat nas compras de títulos do governo. Nosso modelo permite o estudo da otimalidade da compra de portfolio (em termos de duration dos títulos) para os bancos centrais quando estão implementando a política. Além disso, a estrutura heterogênea nos permite olhar para distribuição de renda provocada pelas compras de títulos. Nossos resultados preliminares evidenciam o efeito distributivo do QE. No entanto, nosso modelo expandido apresentou alguns problemas de estabilidade. / In this paper, we proposed a DSGE model that seeks to answer some questions about the recent implemented Quantitative Easing (QE) programs. Our framework is a DSGE model with heterogeneous agents and preferred-habitat in purchases of government bonds. It allows the study of optimality purchasing portfolio (in terms of duration of the bonds) for central banks when they are implementing the policy. Furthermore, the heterogeneous structure allows us to look at income distribution caused by purchases of these securities. Our preliminary results show some distributive effect of QE. However, our expanded model showed some stability problems.

This thesis explores efficiency of monetary policy under zero lower bound condition. At first, is defined a role of monetary policy and criteria to judge the effectiveness of monetary policy are introduced. Then reactions of central banks of USA, Japan and Euro zone are explored. Thesis found out that monetary policy can be effective under a condition of zero lower bound. As last is introduced idea how to improve current monetary regime.

Yes / This paper builds a framework to jointly examine the possibility of both `expansionary fiscal contractions' (austerity increasing output) and `fiscal free lunches' (expansions reducing government debt), arguments supported by the austerity and stimulus camps, respectively, in recent debates. We propose a new metric quantifying the budgetary implications of fiscal action, a key aspect of fiscal policy particularly at the monetary zero lower bound. We find that austerity needs to be highly persistent and credible to be expansionary, and stimulus temporary, responsive and well-targeted in order to lower debt. We conclude that neither are likely, especially during periods of economic distress.

This thesis examines the relationship between price expectations and current consumption. Especially, whether the postponement of final consumption expenditure by households, as a result of their declining price expectations; which may be a deflatively-recessive spiral starter; coincides with economic theory and practice. Based on this, appropriate economic policy recommendations can be drawn. The analysis in the framework of intertemporal consumer model of two periods extended by inflation and the risk confirms this hypothesis. Price expectations positively affect current consumption through the intertemporal substitution effect of real interest rate changes. However, certain assumptions must be fulfilled. Especially, the economy must be in a fixed nominal interest rate environment, the substitution effect must not be offset by the effect of a change in the expected real disposable income or the income effect of the change in the real interest rate and the households must have a higher disposable income so that they can afford to postpone consumption. These findings coincide with the conclusions of the empirical analyzes mentioned in this thesis.

This thesis deals with CNB interventions in favor of the exchange rate depreciation of November 2013. The theoretical part presents alternative tools for unconventional monetary policy when zero lower bound is binding. This thesis then describes the experience of other central banks that responded to low interest rates. Intervention of CNB is contextualized in the Czech financial system and previous economic development. The thesis analyses alternative instruments which CNB might have accessed. Based on the analyzed data this thesis concludes that despite the long-term maintenance of weakened Koruna above the level of announced exchange rate pledge the sufficiently loose monetary policy was not translated into desired price increase.

This diploma thesis describes the intervention of the Czech National Bank in November 2013 in terms of current economic theory and practice as well as its justification. In the first theoretical part is presented actual literature dealing with the zero lower bound (ZLB). This part is divided to general description of ZLB, its prevention and possibilities of monetary policy. Further are described experiences from Japan and other countries which achieved ZLB. In this context is also presented intervention made by the Czech National Bank. Hypothesis whether the intervention was justified is tested by linear and nonlinear Taylor rule. Estimate is made by the least squares method using quarterly data from the CSO and CNB. The results of model confirm the hypothesis, which means that the optimal monetary policy interest rate would fall below zero.

The central bank is not able to further ease monetary conditions once it ex- hausts the space for managing short-term policy rate. Then it has to turn its attention to unconventional measures. The thesis provides a discussion about the suitability of different unconventional policy tools in the Czech situation while the foreign exchange (FX) interventions have proven to be the most appropriate choice. A New Keynesian small open economy DSGE model estimated for the Czech Republic is enhanced to model the FX interventions and to compare dif- ferent monetary policy rules at the zero lower bound (ZLB). The thesis provides three main findings. First, the volatility of the real and nominal macroeconomic variables is magnified in the response to the domestic demand shock, the for- eign financial shock and the foreign inflation shock. Second, the volatility of prices decreases significantly if the central bank adopts price-level or exchange rate targeting rule. Third, intervening to fix the nominal exchange rate on some particular target or to correct a misalignment of the real exchange rate from its fundamentals serves as a good stabilizer of prices while intervening to smooth the nominal exchange rate movements increases the overall macroeconomic volatility at the ZLB. 1