Essays in Macroeconomics and Political Economy

Abstract:     The Response of the Riksbank to House Prices in SwedenIn 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 study investigates whether the Riksbank reacted to house prices in the period from 1993 to 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 perspective. Wealth Distribution under Heterogeneous PreferencesThe standard macroeconomic framework of uninsurable idiosyncratic income risk fails to generate key features of the aggregate wealth distribution. Although the assumptions of heterogeneity of either impatience rate or risk aversion are common in the literature, they do not reflect the evidence and common belief that both parameters are dispersed across the population. I extend the standard framework by allowing for heterogeneity in both impatience and risk aversion. The results suggest that this richer framework outperforms previous work in terms of matching actual properties of the wealth distribution. In particular, the model presented generates a greater concentration of wealth at the top of the distribution and a greater mass of poor households than models with preference heterogeneity in only one dimension. Political Budget Cycles and Dependence on Foreign Aid This study poses the question of whether countries with a higher share of foreign aid per GDP exhibit larger political budget cycles. Using data on a large sample of countries, I find a significant negative effect of aid dependency on the budget surplus in election years. The effect is quantitatively important and implies that on average, a 1% increase in foreign aid per GDP is associated with a 0.2 percentage point larger deficit in election years. The results are robust to the model specification, inclusion of control variables, and other political budget cycles' determining factors described in the recent literature.