Four Essays in Macroeconomics

Abstract

Chapter 1: In this paper, I analyze the interplay between (European) monetary policy and energy prices. Employing a Bayesian proxy structural vector autoregressive model, I establish that the ECB’s decisions have material effects on global and local energy prices. This starkly contrasts the public communication and internal assumptions of the ECB. Through Lucas-critique robust counterfactuals, I demonstrate that the monetary-policy induced changes in energy prices play a crucial role in shaping the response of inflation and inflation expectations to monetary policy. By affecting fast-moving energy prices, monetary policy transmits quickly and more strongly to consumer prices. This turns energy prices from a foe to a friend that, when managed correctly, can assist monetary policy in achieving its objective of price stability. Finally, I ask how European monetary policy should optimally respond to an energy price shock and find that, historically, it has been too accommodative. My estimates suggest that the ECB could have largely avoided the latest energy-price-driven surge in inflation of 10% at the cost of a short-run and comparably small loss in output. I argue that this favorable outcome is precisely due to the ability of the ECB to affect fast-moving energy prices.

Chapter 2: This paper, which is joint work with Max Breitenlechner and Georgios Georgiadis, deals with the domestic repercussions of the global effects of the Federal Reserve’s decisions. In particular, it shows that these “spillovers” from US monetary policy entail “spillbacks” to the domestic economy. Applying counterfactual analyses in a Bayesian proxy structural vector-autoregressive model we find that spillbacks account for a non-trivial share of the slowdown in domestic real activity following a contractionary US monetary policy shock. Spillbacks materialize as a monetary policy tightening depresses foreign sales and valuations of US firms so that Tobin’s q/cash flow and stock market wealth effects impinge on investment and consumption. Net trade does not contribute to spillbacks because US monetary policy affects exports and imports similarly. Geographically, spillbacks materialize through advanced rather than emerging market economies.

Chapter 3: In this paper, which is joint work with Gernot Müller and Georgios Georgiadis, we analyze the interplay of changes in global risk and the appreciation of the US dollar. We identify global risk shocks using high-frequency asset-price surprises around narratively selected events. Global risk shocks appreciate the US dollar, induce tighter global financial conditions and a synchronized contraction of world economic activity. To isolate the role played by the appreciation of the US dollar we benchmark the estimated effects of these global risk shocks against counterfactuals in which the US dollar does not appreciate. By leveraging recent advances in sufficient statistics approaches to macroeconomic policy evaluation and building a rich two-country DSGE model we show that, in the absence of US-dollar appreciation, the contractionary impact of a global risk shock is much weaker. This holds true in the rest of the world as well as the US. For the rest of the world, contractionary financial channels thus dominate expansionary expenditure switching effects when global risk rises and the US dollar appreciates.

Chapter 4: In this paper Georgios Georgiadis and I develop the partial and asymmetric dominant-currency pricing (DCP) hypothesis and test for its empirical relevance. This hypothesis states that a large but not necessarily identical share of global export and import prices are sticky in US dollars and that this impacts the response of an economy to unexpected changes in the US dollar. We first set up a structural three-country New Keynesian dynamic stochastic general equilibrium model which nests DCP, producer-currency pricing (PCP), and local-currency pricing (LCP). Under DCP, the output spillovers from shocks that appreciate the US dollar decline with an economy’s export-import US dollar pricing share differential, i.e. the difference between the share of an economy’s export and import prices that are sticky in US dollar. Underlying this prediction is variation in an economy’s net exports in response to US dollar appreciation that arises because the shares of export and import prices that are sticky in US dollar are different. We then document that this prediction from partial and asymmetric DCP is consistent with the data. We do so by estimating impulse responses to different shocks that appreciate the US dollar for a sample of up to 45 advanced and emerging market economies. We document that our findings are robust to considering US demand, US monetary policy, and exogenous exchange rate shocks as a trigger of US dollar appreciation, zooming in on the responses of economies’ exports and imports, as well as accounting for the role of commodity trade in US dollar invoicing.