| dc.description.abstract | This thesis consists of three essays on New Keynesian Macroeconomics. The first essay
presents empirical evidence that long-run inflation is important in explaining cross-country differences in the response of private consumption to a government spending shock. Contributing to the debate on the size of fiscal multipliers, I motivate my analysis by documenting, in a quarterly dataset of OECD countries, that countries with high long-run inflation display a relatively higher response of private consumption to an increase in government spending. It is on this basis that I develop a small-scale DSGE model with positive trend inflation and show that the higher the trend inflation in an economy is, the higher the response of private consumption to a government spending shock. If we interpret positive trend inflation as the long-run inflation target, I show, convincingly, that the monetary stance of the central banks has important implications for the effectiveness of short-run fiscal policy interventions. Finally, I calculate consumption multipliers. I find that the consumption multipliers in countries with low trend inflation are below one, while under high trend inflation are higher than 2. These multipliers are consistent with the empirical evidence, which I provide in the paper.
The second and third essays focus on the macro-implications of sectoral heterogeneity.
In essay two, I study output dynamics in a closed economy New Keynesian model that
allows for heterogeneity in price stickiness across sectors. Whilst it has been shown that
heterogeneity in price stickiness is the central force for the real effects of nominal shocks, I
present theoretical results that demonstrate the importance of labor mobility across sectors
and the intratemporal elasticity of substitution across sectors. Typically, labor is assumed
to be reallocated immediately across sectors when shocks occur, and my results show how
the reallocation of labor across sectors plays an important role in generating well-known
results. The main insight provided by the analytical results is that there is an equivalence
between changes in labor mobility and the intratemporal elasticity of substitution across
sectors when they are taken into account. These results are driven by the differences in price
stickiness across sectors. I then go on to calibrate the model for the US economy based
on manufacturing and services and broadens the set of shocks driving the business cycle,
verifying his results.
Continuing my work on the macro-implications of sectoral heterogeneity, in my third
essay, I use a Bayesian likelihood approach to contribute to the debate on the origins of
business cycles. I estimate a multi-sector New Keynesian model for the US economy and
provide support for the idea of the importance of studying sectoral shocks. I incorporate real
and nominal frictions and focus on sectoral and aggregate structural shocks. In estimating the
model, I use data at the sectoral level for price inflation, real wages, and output contrary to
the literature choices of using in general only aggregate data or sectoral only for one variable,
usually price inflation. In doing so, I address important questions such as: Which shocks
drive the fluctuations in price inflation, in real wages, and in output? Do sectoral elements
such as the labor mobility and elasticity of intratemporal substitutability across sectors matter
in New Keynesian multisector models? The findings from the estimation, suggest that the
assumption of price/wage heterogeneity across sectors leads to better estimates on sectoral
parameters such as labor mobility in an economy. The version of the model with sectoral data
explains more of the variability in output from sectoral shocks compared to the version of the
model with aggregate data and aggregate shocks. This result brings forward further evidence
in support of using multi-sector models versus one sector model for macroeconomic analysis. | en_GB |
