This dissertation consists of three essays concerning the dynamics of switching economic states such as the expansions and recessions. These essays extend existing methodologies along several dimensions and bring these novel tools to the empirical studies of the U.S. real business cycle, monetary-fiscal policy interaction, and the effect of financial market uncertainty on the macroeconomy.
The first chapter introduces the switching states driven by a nonlinear latent factor whose innovation correlates with the shock of observed time-series in the previous period. We examine the U.S. GDP growth data with this new method and present evidence of nonlinearity in the factor driving the expansion-recession cycle after 1984.
The second chapter introduces unsynchronized switching in a system of equations by allowing several factors, each driving a separate state. The essay also presents a novel identification result for the model. We estimate the U.S. monetary and fiscal policy rules with this new approach and uncover evidence that the fiscal policy shock feeds the dovish-hawkish cycle of monetary policy. The estimation further reveals economically significant monetary-fiscal policy coordination at frequencies longer than 18 months.
The third chapter investigates the effects of time-varying financial market conditions on macroeconomic variables by extending a standard dynamic stochastic general equilibrium model (DSGE) model to incorporate switching degrees of financial friction derived from switching uncertainty process in a costly-state-verification problem. We emphasize the expectation effect of switching financial condition. Transition probabilities influence agents' choice through expectation effect: upon an adverse shock, a bleak outlook of the financial market causes slow recovery of investment. The novelty of this paper is that we introduce feedback from past fundamental shocks to switching dynamics through time-varying transition probability given explicitly as a function of these shocks. Empirically, we uncover evidence of time-varying transition in the U.S. data and quantify the contribution of each fundamental shock.
|Advisor:||Park, Joon Y., Chang, Yoosoon|
|Commitee:||Gordon, Grey, Xu, Ke-Li|
|School Location:||United States -- Indiana|
|Source:||DAI-A 81/2(E), Dissertation Abstracts International|
|Keywords:||Regime switching models, Endogenous feedback|
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