Essays on forward guidance

Ankara : The Department of Economics İhsan Doğramacı Bilkent University, 2014.Thesis (Ph.D.) -- Bilkent University, 2014.Includes bibliographical references leaves 76-80.This dissertation consists of three essays on forward guidance, central bank verbal guidance on future policy rates, and shows how economies respond to it both theoretically and empirically. In the first essay the effects of forward guidance on real economy through interest rate uncertainty is studied as explicit numerical guidance lowers the uncertainty around future interest rates. To analyze the effects of such a policy a New Keynesian model framework incorporating interest rate uncertainty is developed. The results show that a decrease in the uncertainty of interest rates is expansionary in its own right, independent of the level of interest rates the central bank commits to. Thus, distinct from the literature, a new channel for the effectiveness of forward guidance is suggested. The second essay studies the question of whether the optimal amount of interest rate uncertainty is always zero, or whether monetary policy makers may benefit from an increase in the uncertainty. For this purpose a two-country open economy New Keynesian model with interest rate uncertainty is developed, and the effects of interest rate uncertainty on capital flows and exchange rates are studied. The results emphasize that the impact of an increase in the volatility of interest rate mimics the impacts of an increase in the level of the interest rate, and this suggests that uncertainty about the policy rate path can be used by the central bank as a policy tool. The third essay is empirical, and analyses the sensitivity of the interest rates of various maturities to monetary policy uncertainty, which depends on the language used in the monetary policy statements. To measure market responses to the announcements, I first calculate monetary policy surprises and uncertainty surprises by using Federal Funds Futures and Eurodollar Options, respectively. In the event-study analysis it is shown that the reduction in the variability of monetary policy rate expectations due to the explicit content of the statements, has significant effect on the long-term treasury notes.Akkaya, YıldızPh.D

Can the central bank alleviate fiscal burdens?

Central banks affect the resources available to fiscal authorities through the impact of their policies on the public debt, as well as through their income, their mix of assets, their liabilities, and their own solvency. This paper inspects the ability of the central bank to alleviate the fiscal burden by in uencing different terms in the government resource constraint. It discusses five channels: (i) how in ation can (and cannot) lower the real burden of the public debt, (ii) how seignorage is generated and subject to what constraints, (iii) whether central bank liabilities should count as public debt, (iv) how central bank assets create income risk, and whether or not this threatens its solvency, and (v) how the central bank balance sheet can be used for fiscal redistributions. Overall, it concludes that the scope for the central bank to lower the fiscal burden is limited

Ambiguity and Asset Markets

The Ellsberg paradox suggests that people behave differently in risky situations -- when they are given objective probabilities -- than in ambiguous situations when they are not told the odds (as is typical in financial markets). Such behavior is inconsistent with subjective expected utility theory (SEU), the standard model of choice under uncertainty in financial economics. This article reviews models of ambiguity aversion. It shows that such models -- in particular, the multiple-priors model of Gilboa and Schmeidler -- have implications for portfolio choice and asset pricing that are very different from those of SEU and that help to explain otherwise puzzling features of the data.

Estimating the effects of global uncertainty in open economies

This paper investigates the effects of a global uncertainty shock in open economies and the role of country relative risk exposure in the transmission of the shock. We employ an Interacted VAR model to take the time-varying dimension of country relative risk exposure into account. Evidence of nonlinearities in the real effects of a global uncertainty shock is found. The reduction in real activity is larger when the country is more exposed to aggregate risk. These findings support recent theoretical contributions on the role of risk exposure in the transmission of uncertainty shocks

Essays in Macroeconomics

PhDThis thesis explores macroeconomic issues broadly relating to monetary policy. The first chapter studies how the monetary authority should respond to shocks when labour productivity depends on past levels of employment (learning by doing). In this context, the appropriate inflation-output trade-o is between inflation today and the present value of deviations in the output gap. I find that learning induces an increase in the importance of the output gap under a cost-push shock for the (more realistic case) of a distorted steady state. The welfare costs of business cycles are shown to be significantly larger even under the optimal policy. The second chapter introduces noisy news shocks into a model of exchange rate determination to study the importance of these shocks in explaining deviations from uncovered interest parity (UIP). Agents in the foreign exchange market make decisions with imperfect information about economic fundamentals driving interest rate differences across currencies in that they must rely on a noisy signal of future interest rates. Results show that noise shocks are roughly twice as important as news shocks in explaining UIP deviations, with the impact of noise shocks being more pronounced during periods of changing monetary policy. The third chapter develops a new index of economic uncertainty for South Africa for the period 1990-2014 and analyses the macroeconomic impact of changes in this measure. The index is constructed from three sources: (1) forecaster disagreement, (2) a count of international and local newspaper articles discussing economic uncertainty in South Africa and (3) mentions of uncertainty in the quarterly economic review of the South African Reserve Bank. The uncertainty index is a leading indicator of a recession. An unanticipated increase in the index is associated with a fall in GDP, investment, industrial production and private sector employment. Contrary to evidence for the U.S.A and U.K., uncertainty shocks are inflationary. These results are robust to controlling for consumer confidence, a corporate credit spread proxy as well as global risk shocks (VIX index).The financial support provided by Queen Mary, University of London School of Economics & Finance, The Royal Economic Society and Economic Research Southern Afric

Essays on fiscal policy: trade balance deficits, private debt deleveraging, and heterogeneous agents

This thesis addresses three issues of (optimal) fiscal policy related to recent economic developments. The first essay refers to specific economic problems arising in a monetary union by building on a two-country DSGE model where the two countries belong to a monetary union featuring intra-union trade balance imbalances. It is explored if and how a unilaterally implemented budget-neutral tax shift from direct to indirect taxation (fiscal devaluation) may decrease these imbalances. The fiscal devaluation is simulated as a decrease in the social security contributions and an increase in the value added tax. In the first part of the essay, the determinants of the effectiveness of a fiscal devaluation in raising the trade balance are explored. In the second part, these insights are used to simulate a fiscal devaluation applied in the Euro area countries featuring large trade balance deficits. It is found that a fiscal devaluation may be quite effective in reducing trade balance imbalances. In the second essay, the event of a financial shock is regarded. A closed-economy DSGE model is used to simulate a private debt deleveraging shock in a situation where the monetary policy is constrained by the zero lower bound. It is shown that huge welfare losses may arise in such a situation where nominal interest rates are at the zero lower bound. Building on this insight, fiscal policy measures aiming at economic stabilization are investigated. It is found that applying a constrained-optimal fiscal policy in this situation of monetary policy being constrained by the zero lower bound may be highly effective where following the optimal fiscal policy implies a prolonged period of zero interest rates. Finally, the third essay addresses the issue of national distributive effects of these fiscal policy measures by regarding heterogeneous agents within a single country and raising the question of an appropriate social welfare measure. A closed-economy DSGE model populated by two types of households is used to simulate an interest spread shock. While in the main part of the paper the Ramsey planner is modeled in a utilitarian fashion, the results are compared to the case of a Ramsey planner maximizing a social welfare function in the spirit of Rawls. The results indicate that welfare losses of an interest spread shock can be reduced to a larger extent by taxing interest income than by using wage taxes. Moreover, as a central point, it is found that maximizing economy-wide welfare may involve enlarging the disparity between agents if using a utilitarian definition of a social welfare function. Using a social welfare function in the spirit of Rawls can completely offset the disparity between groups but implies a significant decrease in the savers' welfare as well as large output fluctuations. In sum, this thesis shows that fiscal policy may be quite effective in mitigating welfare losses of economic adjustment processes or financial shocks but that distributive issues of these policies seem to be of importance and should be considered in the context of optimal fiscal policy