Thesis advisor: Susanto Basu / My dissertation consists of three independent chapters analyzing parameter estimation and structural change in applied macroeconomics. A first theme linking these papers is structural change, especially as it relates to the monetary policy transmission mechanism through the Phillips curve. A second theme is an assessment of small-sample statistical inference for impulse response functions after estimating macroeconomic models. Two of my chapters provide simulation studies of statistical coverage of standard test statistics after estimating impulse response functions in both atheoretical (local projection) and highly structural (dynamic stochastic general equilibrium) models. The first chapter of my dissertation, ``Using Survey Expectations to Estimate the New Keynesian Phillips Curve,'' provides new estimates of the parameters in the New Keynesian Phillips Curve, exploiting survey based expectations data provided by the Survey of Professional Forecasters and the Michigan Survey of Consumers. I find that the use of survey expectations in US data improves the fit of the textbook Phillips Curve model to the data and provides economically sensible estimates of its coefficients. The estimated model provides stable parameter estimates until the Great Recession, after which inflation becomes less dependent on marginal cost. Household and professional forecasts each contribute to the forward-looking component of inflation expectations, with household forecasts given more weight. The second chapter of my dissertation, ``Estimating Structural Breaks in Impulse Response Functions via the Local Projection Estimator,'' proposes an estimator for parameter instability in impulse response functions that are estimated by local projections. I use the estimator to investigate the presence of parameter instability in the Romer--Romer monetary policy shocks. I find evidence of a structural break in the impulse response coefficients in the late 1970s. In the early period, there is strong evidence that monetary policy shocks have real effects. There is little evidence that monetary policy shocks have real effects in the later period. Tax and oil price shocks exhibit little change in their effects on output throughout the postwar period. The third chapter of my dissertation, ``Standard Errors for Impulse Response Functions of Estimated DSGE Models,'' provides a method for constructing appropriate asymptotic standard errors for impulse responses of estimated dynamic stochastic general equilibrium models. The method requires only the matrices characterizing the model solution, the derivatives of those matrices with respect to the underlying structural parameters, and the covariance estimate of the structural parameters themselves. I provide simulation evidence on the small-sample properties of these standard errors. / Thesis (PhD) — Boston College, 2020. / Submitted to: Boston College. Graduate School of Arts and Sciences. / Discipline: Economics.

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Thesis (Ph.D. (Economics))-University of Pretoria, 2005. / Abstract in English. Includes bibliographical references. Available on the Internet via the World Wide Web.

We establish a set of US stylized facts on prices, quantities and balance sheets, assess the consistency of the current generation of financial DSGE models to these, and provide guidance on the challenges ahead. We mainly find four aspects which future financial friction models should take into acc~unt. The first is the profound shift in household financing structure, botli on the asset and liability side, which has meant that they have been left vulnerable. Second, the balance sheet of firms has become increasingly lever aged and coupled with more volatile and pro cyclical equity prices has rrieant that the balance sheet of firms has become ihcreasirlgly procyclical and volatile since the 1990's. The current generation of FA models do capture some aspects of this but produce excessively smooth results. Third, it would be of interest for policy makers to find the optimal level/percentage of foreign ownership of the Federal debt at which the debt portfolio is diversified, but the future government budget constraint and its stabilisation capacity is not put in danger by over-exposure to international shocks. Lastly, models might be extended to include a regime-switching mechanism and explore the effects on model dynamics and model stability when the economy goes from a low volatility-low correlation state to a high volatility-high correlation state. A wider implication of our findings is that accumulation of stocks might alter agents risk preferences, production technologies, or beliefs to such a degi'ee that the optimization problem that those agents face has transformed over time .. The economy is effectively in a different state of nature, and agents may face c;lifferent constraints. Future macroeconomic models need to take a different strategy to modelingthe long-run ratios, since these have increased over the long-run, and .this has had an effect on boththe frequency and the amplitude of the business cycles. Chapter 2 Following recent observations by policymakers of the Bank of England and others that low financial market confidence and pessimistic expectations about bank (and non-bank fii'm) profits over the next three years has lead to unusually low price-to-book ratios, we incorporate a market price mechanism in a general equilibrium framework. More specifically, we introduce an endogenous wedge between inarket and book value of capital, and make investment a function of the wedge in a standard financia1 accelerator model. The price wedge is driven by an information set containing expectations about the future state of the economy. The result is that the impulse responses to exogenous disturbances are some two to three times more volatile than in the benchmark financial accelerator model. Moreover, the model offers an improved matching in firm variables and financial rates to US data compared to the standard Bernanke, Gertler and Gilchrist (1999) model. We also derive a model based quadratic, loss function and measure the extent to which \ monetary policy can feed a bubble by further loosening the credit market frictions that entrepreneurs face. In addition, we take into account the possibility that policymakers have incomplete information about the current state of. the economy and therefore make errors type I and II in deciding what policy to implement. A policy that explicitly targets stock market developments can be shown to improve welfare in terms of miriimizing the consumption losses of consumers, even when we account for a degree of incomplete information of central bankers regarding the current state of the economy. To conclude, we find that for a monetary authority to be indifferent betweeri responding and not responding to stock market developments, the probability of an economy with a positive asset price wedge needs to be between 2 and 6 percent lower than the probability of an economy without a wedge. Chapter 3 Locating the appropriate degree of interaCtion between fiscal and monetary policy . plays remains a key issue in ensuring economic stability. Their joint impact is, however, still unclear. We use a Bayesian TVP-VAR model with a tight identification scheme to examine the interaction between the two policies between 1979 and 2013. We observe significant differences in the transrriission of shocks, in particular between the Great Recession and the Great Moderation. Monetary policy reacts more aggressively to stabilize the economy during Volcker, whereas fiscal policy does so during the Great Recession. Second, we find a high degree of interactions between monetary and fiscal policy. They behave as substitutes for both the spending and monetary policy shocks but as compliments for a taX, shock. Third, government revenues largely infhience decisions on spending, while spending does not influence tax decisions. Fourth, the spending multiplier is large and persistent, in particular during recessionary periods. We conclude that the spending stimuli are more effective in expanding output than tax cuts by as much as ?O percent. Under certain conditions regarding private agent expectations, spending increases can result in high and persistent growth.

This thesis examines empirical and theoretical issues related to the role of uninsurable individual risk and heterogeneity in macroeconomics. The thesis includes four chapters. The first chapter uses data from the Panel Study of Income Dynamics (PSID) to test full risk-sharing among North American households. The second chapter is a short essay where I use simulated data to show how the method applied in the previous chapter can be used to distinguish between partial risk sharing and imperfect credit markets. The third chapter develops a heterogeneous agent dynamic general equilibrium model which jointly models aggregate saving and employment. Finally, the fourth chapter investigates empirically the ability of financial market incompleteness to help explaining the equity premium puzzle. The central motivation throughout this dissertation is the recognition that the interaction between cross-sectional volatility and aggregate volatility is of fundamental importance to understand the way we should model macroeconomic aggregates such as aggregate consumption, asset prices and business cycle fluctuations.

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