Three essays in macroeconomics
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Abstract
This dissertation consists of three self-contained essays on macroeconomics.
The first chapter, coauthored with Jianjun Miao, studies the implications of the low interest rate environment on monetary and fiscal policy interactions. We provide a dynamic new Keynesian model in which entrepreneurs face uninsurable idiosyncratic investment risk and credit constraints. Government bonds provide liquidity services and raise net worth. Multiple steady states with positive values of public debt can be supported for a given permanent deficit-to-output ratio. The steady-state interest rates are lower than the economic growth rate and public debt contains a bubble component. We analyze the determinacy regions of policy parameter space and find that a large set of monetary and fiscal policy parameters can achieve debt and inflation stability given persistent fiscal deficits both away from and at the zero interest rate lower bound.
The second chapter, coauthored with Zheng Liu and Jianjun Miao, investigates the effectiveness of fiscal stimulus under average inflation targeting (AIT) in a New Keynesian model featuring interactions between monetary and fiscal policies. AIT implies gradual adjustments in the policy interest rate that reacts to a history-dependent inflation target. We show that the effectiveness of fiscal stimulus differ across policy regimes. In a monetary regime with an active monetary rule and a passive fiscal rule, the cumulative fiscal multiplier is smaller than the impact multiplier because of the persistently high policy interest rate. In a fiscal regime with an active fiscal rule and a passive monetary rule, the cumulative fiscal multiplier is instead larger than the current multiplier, due to the weak reactions of monetary policy to average inflation. In a liquidity trap driven by a negative demand shock, increasing history-dependence of the inflation target shortens the duration of the liquidity trap. But the size of fiscal multiplier is smaller in the monetary regime and depends nonlinearly on the degree of history-dependence of the inflation target in the fiscal regime.
In the third chapter, I build a tractable real business cycle model with financial frictions in the banking sector. A key assumption is that Treasury securities are the major collateral in the wholesale interbank market. I show that Ricardian equivalence fails if the supply of public debt is lower than a certain threshold. A shortage of public debt will reduce credit supply and encourage financial speculation at the same time, with the two channels having different effects on capital accumulation. Given a mild shortage of public debt, the net impact is that credit spread arises, asset price dispersion increases, and aggregate output declines. A permanent increase in government spending, if financed by public debt, has positive externalities stemming from the improvement of financial intermediation. In a more general model calibrated to the U.S. economy, I find that a small negative investment opportunity shock can generate a sizable economic recession. A debt-financing government spending can generate a cumulative fiscal multiplier above one, with both investment and consumption being crowded in.