Essays in monetary economics and applied econometrics
Abstract: This dissertation collects five independent essays.The first essay is An Alternative Explanation of the Price Puzzle. The most widely accepted explanation of the price puzzle points to an inadequate performance of the VAR in forecasting inflation. This essay suggests that the finding of a price puzzle is due to a seemingly innocent misspecification in taking the theoretical model to the data: a measure of output gap is not included in the VAR (output alone being used instead), while this variable is a crucial element in every equation of the theoretical models. When the VAR is correctly specified, the price puzzle disappears. Building on results contained in the first paper, the second-- Stronger Evidence of Long-Run Neutrality: A comment on Bernanke and Mihov---improves the empirical performance of standard models on the prediction that a monetary policy shock should have temporary effects on output. It turns out that the same misspecification causing the price puzzle is also responsible for overestimation of the time needed for the effects on output of a monetary policy shock to die out. The point can be proven in a theoretical economy, and is confirmed on US data.Monetary Policy Without Monetary Aggregates: Some (Surprising) Evidence , joint with Giovanni Favara) is the third essay. It points to what seems to be a falsified prediction of models in the New-Keynesian framework. In this framework monetary aggregates are reserved a pretty boring role, so boring that they can be safely excluded from the final lay out of the model. These models predict that a money demand shock should have no effect on output, inflation and interest rate. However, the prediction seems to be quite wrong Inflation Forecast Targeting, joint with Paul Söderlind, takes a step outside the representative-agent framework. In RE models, all agents typically have the same information set, and therefore make the same predictions. However, in the real even professional forecasters show substantial disagreement. This disagreement can have an impact on asset prices and transaction volumes, among other things. However, there is no unique way of aggregating forecasts (or forecast probability density functions) into a measure of disagreement. The paper deals with this problem, surveying some proposed methods. The most appropriate measure of disagreement turns out to depend on the intended use, that is, on the model. Moreover, forecasters underestimate uncertainty. Constitutions and Central-Bank Independence: An Objection to McCallum's Second Fallacy, joint with Giancarlo Spagnolo , is an excursion into the field of Political Economy. The essay provides some foundations for the assumption that renegotiating a delegation contract can be costly by illustrating how political institutions can generate inertia in re-contracting, reduce the gains from it or prevent it altogether. Once the nature of renegotiation costs has been clarified, it is easier to see why certain institutions can mitigate or solve dynamic inconsistencies better than others.
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