Three Essays in MacroeconomicsPublic Deposited
Chapter one investigates the impact of agents' expectations about future fundamental economic disturbances (news) on macroeconomic dynamics. Several intuitive tests provide insight into the information content of the yield curve and its' ability to identify these 'news' disturbances. Bayesian estimation of a dynamic stochastic general equilibrium (DSGE) model using conventional macroeconomic aggregates and term structure data suggests that news shocks are important for understanding economic fluctuations. Chapter two presents a 'hybrid' model of the yield curve that systematically incorporates the cross-equation restrictions of a structural dynamic stochastic general equilibrium model into an affine macro-factor model of interest rates. News , factors identified by interest rates that help to forecast future macroeconomic aggregates, are introduced into the modeling framework. Bayesian model comparison and classical likelihood ratio tests confirm the presence of news in the yield curve. Variance decompositions reveal that news shocks are responsible for a considerable amount of variation in yield curve factors. The Bayesian methodology provides a natural identification scheme for the various fundamental economic shocks and reveals the dimensions on which the structural model is misspecified. Interestingly estimated risk premia are found to vary much less over time when news shocks are included in the estimation. Chapter three discusses 'business cycle accounting' (BCA), an approch proposed by Chari, Kehoe and McGrattan (2006, CKM) who argue that models of financial frictions which create a wedge in the intertemporal Euler equation are not promising avenues for modeling business cycle dynamics. There are two reasons that this conclusion is not warranted. First, small changes in the implementation of BCA overturn CKM's conclusions. Second, one way that shocks to the intertemporal wedge impact on the economy is by their spillover effects onto other wedges. This potentially important mechanism for the transmission of intertemporal wedge shocks is not identified under BCA. CKM potentially understate the importance of these shocks by adopting the extreme position that spillover effects are zero.