Essays in Macroeconomics: Consumption, Fiscal Multipliers, and Oil Prices

Abstract

This thesis, titled Essays in Macroeconomics: Consumption, Fiscal Multipliers, and Oil Prices, contains three papers in the broad macroeconomics field three chapters. Three abstracts of the papers have been presented here. Chapter 1 aims to investigate the response of consumption to transitory shocks in a heterogeneous agent model with two assets and default risk. In order to analyse this response, the paper studies the application of discrete choice techniques (Extreme Value Shocks Method/Taste Shocks Method) in several versions of the model. The method appears to be reliable in capturing the effect of endogeneity of the borrowing constraint due to default in both the one-asset and two-asset models. The baseline results show that the presence of default raises the aggregate marginal propensity to consume as the pricing of risk creates further credit frictions for many households. Furthermore, the findings also suggest that households' responses vary more widely across heterogeneous households if there are endogenous borrowing constraints and spreads. Keywords: Heterogeneous agent model, MPC, Tasteshock, Liquid/illiquid asset, Default. Chapter 2 examines the effects of social spending on GDP growth in the UK economy. The Structural Vector Autoregressive (SVAR) method with sign restriction has been applied to quarterly data for 27 years in order to assess the impact of social expenditure shocks on economic growth. The study suggests that a positive shock in social spending increases GDP growth in the short term. In addition, results are robust to different countries and under different monetary policies. Furthermore, the analysis found that negative tax shock also has a positive impact on GDP. Keywords: Social spending, GDP growth, Structural Vector Autoregressive (SVAR), Sign restriction. Chapter 3 investigates the influence of the pandemic and trade policy uncertainty on the dynamics of oil price returns over the last two decades, using a Mixed-Frequency Vector Autoregressive (MF-VAR) model. The study found that pandemic uncertainty and, more importantly, trade policy uncertainty significantly explain EU Brent and WTI oil price returns. Additionally, pandemic and trade policy uncertainty shocks are linked with lower (higher) oil price returns in the short-term (medium-term). Furthermore, while the mixed-frequency approach captures the persistent response of oil price returns to the uncertainty shocks, the single common-frequency (i.e., quarterly) framework only uncovers a muted reaction. Keywords: Oil price fluctuations, Pandemic uncertainty, Trade policy uncertainty, World uncertainty, Mixed-frequency VAR model, Mixed-frequency Granger-causality test