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Professional survey forecasts and expectations in DSGE models
Rychalovska, Y. ; Slobodyan, Sergey ; Wouters, R.
In this paper, we demonstrate the usefulness of survey data for macroeconomic analysis and propose a strategy to integrate and efficiently utilize information from surveys in the DSGE setup. We extend the set of observable variables to include the data on consumption, investment, output, and inflation expectations, as measured by the Survey of Professional Forecasters (SPF). By doing so, we aim to discipline the dynamics of model-based expectations and evaluate alternative belief models. Our approach to exploit the timely information from surveys is based on re-specification of structural shocks into persistent and transitory components. Due to the SPF, we are able to improve identification of fundamental shocks and predictive power of the model by separating the sources of low and high frequency volatility. Furthermore, we show that models with an imperfectly-rational expectation formation mechanism based on Adaptive Learning (AL) can reduce important limitations implied by the Rational Expectation (RE) hypothesis. More specifically, our models based on belief updating can better capture macroeconomic trend shifts and, as a result, achieve superior long-term predictions. In addition, the AL mechanism can produce realistic time variation in the transmission of shocks and perceived macro-economic volatility, which allows the model to better explain the investment dynamics. Finally, AL models, which relax the RE constraint of internal consistency between the agents’ and model forecasts, can reproduce the main features of agents’ predictions in line with SPF evidence and, at the same time, can generate improved model forecasts, thus diminishing possible inefficiencies present in surveys.
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ICT Corporation within the Modern Market Economy: Benefits and Side Effects of Hosting "Silicon Valley"
Bakharev, Konstantin ; Slobodyan, Sergey (advisor) ; Kejak, Michal (referee)
The growth of the information and communications technology (ICT) industry over the last couple of decades, spurred by rapid technological changes within the fields of collection and distri bution of information, has led to a noticeable shift in the modern policies implemented by govern ments hosting large IT corporations. Tax benefits, subsidies, labor law exemptions, and government purchases are a few ways how a country can make itself more attractive for new "Google" facilities and support the growth of the ICT sector. However, these policies may not always be beneficial for the economic growth and development of innovative sectors. In this thesis, I study the efficiency of government programs that target ICT firms and show that such support programs may be more suitable for developing countries. A general equilibrium model with innovative goods producers and capital tax provides the theoretical framework and intuition for why the effects of this tax are different for a developed and developing economies. I explicitly show that elasticity of substitution on innovative markets play a significant role for the efficiency if ICT support programs. I employ the IV approach to support my results for the sample of European countries from 1998 until 2020 and study the possible channels for the effect...
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Essays on Interbank Interest Rates
Kovář, Kamil ; Slobodyan, Sergey (advisor) ; Franta, Michal (referee) ; Burlon, Lorenzo (referee)
Essays on interbank interest rates This thesis studies the behavior of interbank interest rates in the af- termath of the global financial crisis. This crisis and its macroeconomic consequences led to a sharp break in how monetary policy is conducted, with unconventional tools such as quantitative easing (QE) programs gain- ing prominence. One consequence of such policies is a change in the behavior of interbank interest rates. This behavioral change is due to the emergence of excess reserves, which are a side effect of many unconventional policies including quantitative easing. The first chapter explores the nexus between the QE program conducted by the European Central Bank, its policy of negative policy rates and the interbank interest rates. It starts with data analysis that demonstrates two salient features of the behavior of interbank interest rates in the presence of excess reserves. First, when excess reserves are present interbank interest rates are anchored by the deposit rate rather than by the main refinancing rate, as was the case before emergence of excess reserves. Second, the amount of excess reserves is negatively correlated with the level of interbank interest rates whenever excess reserves are present. The chapter proposes a semi- structural time series model that links interbank interest...
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Essays on Macroeconomic Policies and Family Economics
Tolstova, Vera ; Slobodyan, Sergey (advisor) ; Herrington, Christopher (referee) ; Kocharkov, Georgi (referee)
English In a real economy, decisions on investments in the human capital of children are made by families rather than by atomistic parents as is typically assumed in the literature. The first chapter of this dissertation incorporates family formation into an otherwise standard dynastic framework with human capital accumulation. The study finds that accounting for differences in taxation and education policies between the U.S. and 10 OECD countries is sufficient to replicate cross-country variations in the degree of assortative matching and its positive correlation with the intergenerational persistence of earnings. Positive assortative matching is crucial to a model's ability to generate realistic levels of the intergenerational earnings correlations observed in the data. In the second chapter, I develop a simple dynastic model in the style of Barro and Becker (1989), with endogenous fertility and human capital accumulation, to quantify the optimal progressivity of higher education subsidies. I find that the optimal policy is characterised by a higher degree of progressivity than current U.S. education subsidies. Additionally, the relations between the degree of progressivity of education policies and welfare/ population growth are hump-/ U- shaped...
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Sparse restricted perception equilibrium
Audzei, Volha ; Slobodyan, Sergey
In this paper we study model selection under bounded rationality and the impact of monetary policy on the equilibrium choice of forecasting models. We use the concept of sparse rationality (developed recently by Gabaix, 2014), where paying attention to all possible variables is costly and agents can choose to over- or under-emphasize particular variables, even fully excluding some of them. Our main question is whether an initially mis-specified equilibrium (the restricted perceptions equilibrium, or RPE) is compatible with the equilibrium choice of sparse weights describing the allocation of attention to different variables by the agents inhabiting this RPE. In a simple New Keynesian model, we find that the agents stick to their initial mis-specified AR(1) forecasting model choice when monetary policy is less aggressive or inflation is more persistent. We also identify a region in the parameter space where the agents find it advantageous to pay attention to no variable at all.
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Essays on Macroeconomics with Financial Frictions
Audzei, Volha ; Slobodyan, Sergey (advisor) ; Wouters, Rafael (referee) ; Benigno, Pierpaolo (referee)
This dissertation analyzes how relaxing the assumption of rational expectations modifies the output of macroeconomic models. In particularly we show how imperfect information among the financial agents modifies their risk-taking decisions, the effect of monetary policy on banks' lending or equilibrium selection. In the first paper we incorporate a model of the interbank market into a standard DSGE model, with the interbank market rate and the volume of lending depending on market confidence and the perception of counterparty risk. As a result, a credit crunch occurs if the perception of counterparty risk increases. Changes in market confidence then can generate credit crunches and contribute to the depth of recessions. We conduct an exercise to mimic some central bank policies: targeted and untargeted liquidity provision, and reduction of the reserve rate. Our results indicate that policy actions have a limited effect on the supply of credit if they fail to influence agents' expectations. A policy of a low reserve rate worsens recessions due to its negative impact on banks' revenues. Liquidity provision stimulates credit slightly, but its efficiency is undermined by liquidity hoarding. The second paper is devoted to a problem of excessive risk-taking by financial agents. Recent central banks' policies...
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Monetary and Fiscal Policy in Emerging Open Economics
Algozhina, Aliya ; Slobodyan, Sergey (advisor) ; Galuščák, Kamil (referee) ; Lewis, Vivien (referee)
Title: "Monetary and Fiscal Policy in Small Open Economies" Abstract This dissertation studies monetary and fiscal policies jointly, with their respective policy rules in a small open economy. Policy interactions have attracted new research interest since the 2008 crisis due to a global increase in fiscal debt. The first chapter extends the standard New Keynesian model of a small open economy with the structural specifics relevant for emerging market countries: two instruments of monetary policy - interest rate and foreign exchange interventions, two instruments of fiscal policy - public consumption and public investment, two types of households - forward-looking and rule-of- thumb consumers, and foreign debt via collateral constraint. Imperfect capital mobility is assumed, as foreign borrowings are restricted and there is a positive steady state difference between the domestic and foreign interest rates, due to more impatient households in the domestic economy. Parameters are calibrated for Hungary and the model's simulation is compared between two cases: with and without a collateral constraint. The results show that fiscal and monetary policy shocks transmit to the economy differently from the standard Mundell-Fleming model. A positive public investment shock can cause exchange rate depreciation and...
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Essays on Shadow Banking and Asset Pricing
Kuncl, Martin ; Slobodyan, Sergey (advisor) ; Nikolov, Kalin (referee) ; Malherbe, Frédéric (referee)
This dissertation deals with the topics related to securitization and with pricing of finan- cial assets in general. The topics are analyzed from a macroeconomic perspective using various theoretical and empirical methods. The first chapter studies the efficiency of financial intermediation through securitiza- tion with asymmetric information about the quality of securitized loans. In this theoret- ical model I show that, in general, by providing reputation-based implicit recourse, the issuer of a loan can credibly signal its quality. However, in boom stages of the business cycle, information on loan quality remains private, and lower quality loans accumulate on balance sheets. This deepens a subsequent downturn. The longer the duration of a boom, the deeper the fall of output in a subsequent recession will be. I present empir- ical evidence from securitization deal level data consistent with this result. Finally, the model suggests that excessive regulation which requires higher explicit risk-retention by the originators of loans can adversely affect both quantity and quality of investment in the economy. The second chapter presents a Markov-switching DSGE model which focuses on the adverse selection on re-sale markets for securitized products. The complexity of secu- ritized assets, which make it...
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Essays on Economics of Adaptive Learning and Imperfect Monitoring
Janjgava, Batlome ; Slobodyan, Sergey (advisor) ; McGough, Bruce (referee) ; Kasa, Kenneth (referee)
The topic of this dissertation is equilibrium selection in models with incomplete and imperfect information. The dissertation consists of three chapters. In the first two chapters, I focus on firms' decision problems with a structural uncertainty and imperfect monitoring. In the first chapter, co-authored with Sergey Slobodyan, we study a market with two firms competing in quantities. Firms are uncertain about demand parameters and have to learn them using price signals. Although the Cournot output is the Nash equilibrium in the model, we identify conditions when cooperative behavior may arise due to learning and find an endogenous price threshold that triggers such behavior. We show that cooperation is more probable in markets with higher precision of firm-specific shocks. In the second chapter, I investigate the social efficiency of free entry in homogeneous product markets. In general, free entry is considered desirable for a society from a social welfare point of view and thus, represents traditional wisdom among economic professions. However, many economists have challenged this view and shown that under Cournot oligopoly with fixed setup costs, the free entry equilibrium always delivers excessive entry in homogeneous product markets, known as the excess entry theorem. In this chapter, I reexamine the...
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