Essays on Macroeconomics and International Finance

This thesis addresses three topics in Macroeconomics and International Finance. Chapter 1 studies welfare implications of international financial integration in the presence of bank funding risks. Unregulated issuance of safe short-term liabilities by financial intermediaries leads to excessive reliance on this form of financing, which increases losses associated with financial crises. First, I show that integration increases the severity of potential financial crises in the countries that receive capital inflows. As a result, integration may reduce welfare for these countries. Second, I show that if macroprudential regulation of the banking sector is chosen by each country in an uncoordinated way, the outcome can be Pareto inefficient so that there is a role for global coordination of such policies. This effect arises because the macroprudential regulation that limits the overissuance of safe liabilities changes the international interest rate. The regulation may have an additional benefit from manipulating the interest rate. Third, the desire to manipulate the interest rate when regulating the local banking sector creates incentives to use two regulatory tools: macroprudential regulation of the banking sector and capital controls. Chapter 2, written jointly with Emi Nakamura and Jon Steinsson, quantifies the importance of long-run risks---persistent shocks to growth rates and uncertainty---in a panel of long-term aggregate consumption data for developed countries. We identify sizable and highly persistent world growth-rate shocks as well as less persistent country-specific growth rate shocks. The world growth-rate shocks capture the productivity speed-up and slow-down many countries experienced in the second half of the 20th century. We also identify large and persistent world shocks to uncertainty. Our world uncertainty process captures the large but uneven rise and fall of volatility that occurred over the course of the 20th century. We find that negative shocks to growth rates are correlated with shocks that increase uncertainty. Our estimates based on macroeconomic data alone line up well with earlier calibrations of the long-run risks model designed to match asset pricing data. We document how these dynamics, combined with Epstein-Zin-Weil preferences, help explain a number of asset pricing puzzles. Chapter 3, written jointly with Neil R. Mehrotra, investigates the relationship between sector-specific shocks, shifts in the Beveridge curve, and changes in the natural rate of unemployment. We document a significant correlation between shifts in the US Beveridge curve in postwar data and periods of elevated sectoral shocks relying on a factor analysis of sectoral employment to derive our sectoral shock index. We provide conditions under which sector-specific shocks in a multisector model augmented with labor market search generate outward shifts in the Beveridge curve and raise the natural rate of unemployment. Consistent with empirical evidence, our model also generates cyclical movements in aggregate matching function efficiency and mismatch across sectors. We calibrate a two-sector version of our model and demonstrate that a negative shock to construction employment calibrated to match employment shares can fully account for the outward shift in the Beveridge curve. We augment our standard multisector model with financial frictions to demonstrate that financial shocks or a binding zero lower bound can act like sectoral productivity shocks, generating a shift in the Beveridge curve that may be counteracted by expansionary monetary policy

Central Bank balance sheet policies without rational expectations

We study the effects of central bank balance sheet policies—namely, quantitative easing and foreign exchange interventions—in a model where people form expectations through an iterative level-k thinking process. We emphasize two main theoretical results. First, under a broad set of conditions, central bank interventions are effective under level-k thinking, while they are neutral in the rational expectations equilibrium. Second, when preferences exhibit constant relative risk aversion, asset purchases increase aggregate output if they target assets with pro-cyclical returns but reduce it if asset returns are counter-cyclical. Finally, we empirically show that forecast errors about future asset prices are predictable by balance sheet interventions, a property that differentiates our channel from popular alternatives, such as portfolio-balance and signaling channels

Growth-rate and uncertainty shocks in consumption: cross-country evidence

We provide new estimates of the importance of growth-rate shocks and uncertainty shocks for developed countries. The shocks we estimate are large and correspond to well-known macroeconomic episodes such as the Great Moderation and the productivity slowdown. We compare our results to earlier estimates of "long-run risks" and assess the implications for asset pricing. Our estimates yield greater return predictability and a more volatile price-dividend ratio. In addition, we can explain a substantial fraction of cross-country variation in the equity premium. An advantage of our approach, based on macroeconomic data alone, is that the parameter estimates cannot be viewed as backward engineered to fit asset pricing data. We provide intuition for our results using the recently developed framework of shock-exposure and shock-price elasticities

Government spending multipliers under the zero lower bound: evidence from Japan

Using a rich data set on government spending forecasts in Japan, we provide new evidence on the effects of unexpected changes in government spending when the nominal interest rate is near the zero lower bound (ZLB). The on-impact output multiplier is 1.5 in the ZLB period, and 0.6 outside of it. We estimate that government spending shocks increase both private consumption and investment during the ZLB period but crowd them out in the normal period. There is evidence that expected inflation increases by more in the ZLB period than in the normal period

The effects of tax changes at the zero lower bound: evidence from Japan

We use the narrative approach to identify tax changes unrelated to current economic conditions and estimate the effects of these changes on macroeconomic variables during and outside of the zero lower bound period in Japan. We find little difference in the output responses across the two periods. However, the responses of aggregate consumption, investment, and imports are significantly different in the two periods within the first few quarters