Daria Finocchiaro s u

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c Daria Finocchiaro Stockholm 2007,ISSN 0346 6892,ISBN 978 91 7155 465 9. Cover Picture Olle Baertling Agra 1959 Oil on canvas 97x195. Printed in Sweden by Intellecta Docusys Stockholm 2007. Distributor Institute for International Economic Studies. Doctoral Dissertation,Department of Economics,Stockholm University. This thesis consists of three self contained essays on macroeconomics. Inattentive Consumers in General Equilibrium This paper explores the e ects. of heterogeneity in planning propensity on wealth inequality asset prices and wel. fare I consider a simple model economy populated by attentive and inattentive. agents Attentive agents plan their consumption savings or stock holdings period. by period while inattentive ones plan every other period In partial equilibrium. with xed asset prices inattentive consumers face more uncertainty and save more. for precautionary reasons In general equilibrium their savings are positively cor. related with bond prices but inattentive consumers still accumulate more wealth. Moreover asset prices are much more volatile than in a representative agent model. with full attention because they must induce attentive consumers to voluntarily. bear the entire burden of adjusting to aggregate shocks In a simple two period. portfolio choice model driven by uncertain asset returns however infrequent revi. sions of portfolios can produce the opposite result inattentive investors accumulate. less wealth, Monetary Regime Change and Business Cycles This paper analyzes how changes. in monetary policy regimes can in uence the economic dynamics in a small open. economy We estimate a DSGE model on Swedish data incorporating the change. in 1993 from an exchange rate targeting to an in ation targeting regime For each. regime we estimate the behavior of the monetary authority and the relative contri. bution to the business cycle of structural shocks The results con rm that monetary. policy indeed mainly reacted to exchange rate movements in the target zone and to. in ation in the in ation targeting regime A variance decomposition analysis sug. gests that devaluation expectations were the main source of volatility in the target. zone period In the in ation targeting period labor supply and preference shocks. become relatively more important Shocks to foreign variables were in general more. destabilizing under the target zone regime than under in ation targeting. Do Central Banks React to House Prices Recently house prices have undergone. major uctuations in many industrialized economies which has drawn the attention. of policymakers and academics towards the developments in housing markets and. their implications for monetary policy In this paper we ask whether the U S Fed. the Bank of Japan and the Bank of England have reacted to house price in ation. We study the responses of these central banks by estimating a structural model for. each country where credit constrained agents borrow using real estate as collateral. The main result is that house price movements did play a separate role in the U K. and Japanese central bank reaction functions in the last years while they did not. in the U S,Acknowledgments, This thesis consists of three self contained essays which I would never have been. able to write without the encouragement friendship and advice of some exceptional. people who crossed my path during my Ph D experience I would like to take this. opportunity to express my deepest gratitude even though due to space limitation. it is not possible to mention them all, First and foremost I would like to thank my main advisor Torsten Persson.
My debt to Torsten is immeasurable I owe him long hours of fruitful discussions. and invaluable comments but most of all I am grateful for his continuous support. in nite patience and for always being such an excellent guide through the intricate. world of research Not to forget thanks to him I developed an incredible skill to. interpret even the most cryptic handwriting, I would also like to express my deepest gratitude to John Hassler and Per Krusell. Not only were their doors always open they also gave me priceless feedback on an. uncountable number of drafts and taught me the importance of thinking recursively. This thesis was written at the Institute for International Economic Studies I. am grateful to all the sta faculty and Ph D fellows at the institute for making it. such an inspiring and pleasant place Annika Andreasson and Christina L nnblad. deserve a special mention for being so helpful with everything during these years. but most of all for always nding the right cure for a bad Ph D day I would also. like to thank Christina L nnblad for outstanding editorial assistance. As a monetary economist I like to think that money matters Financial support. from the Royal Swedish Academy of Sciences Widar Bagge s Kock Lindberg s and. Handelsbanken s Research Foundations is gratefully acknowledged. I am thankful to the faculty and Ph D students of Princeton University where. I spent one academic year as a visitor for turning that year into such a great. experience I am particularly thankful to Vasco C rdia with whom I had the great. pleasure to work on chapter 3 of this thesis, Anna Helena Martina and Virginia made these years in the Ph D program un. forgettable lling them with fantastic moments disconnected from academic prob. lems In particular I would like to thank Virginia Queijo von Heideken my coauthor. on chapter 4 o ce mate since the very beginning companion during years of un. successful for me Swedish courses and most of all great friend For being a good. Miranda when I am too much of a Charlotte and helping me decrypt Torsten s. handwriting when even my expertise was not enough, These years spent solving problem sets programing in Matlab and trying to get. pathbreaking research ideas would not have been so exciting had I not made some. great friends along the way This is the biggest bonus of this Ph D Alessandra. Caterina Elena Marieke Irina Mauricio and Raquel thanks for all the girls din. ners kas depressive French movies and hilarious gym or painting classes that made. these Ph D years so much more fun, A very special thank to my friends outside academia for being so supportive. during these years even when my problems were as obscure as convergence issues. This work would not have been possible without the support and encouragement. of my family both the Italian and the Swedish side Thank you for being so patient. accepting my mood swings and always showing interest in my progress. But most of all I am indebted to Martin Nor us for cheering me up during. the downsides and sharing my excitement during the happy research days of my. Ph D experience for being my biggest supporter but also my harshest criticizer if. sometimes absorbed in some theoretical model I lost connection with reality for. all his unconditional love and patience it is to him I dedicate this thesis. Stockholm October 2007,Daria Finocchiaro,Table of Contents.
Chapter 1 Introduction 1,Chapter 2 A General Equilibrium Model. with Inattentive Consumers 7, Chapter 3 Monetary Regime Change and Business Cycles 43. Chapter 4 Do Central Bank React to House Prices 91. Bibliography 143,Introduction, This thesis consists of three self contained essays that deal with di erent aspects. of macroeconomics The rst essay is a theoretical study of how di erences across. people in their propensity to plan a ect wealth accumulation and asset prices The. second and third essays are empirical studies The second studies how a regime. change in monetary policy altered the determinants of the Swedish business cycles. while the third essay addresses the question of whether the central banks in the. U S U K and Japan have reacted to house price in ation in the last twenty years. Even though the topics of the three chapters are rather di erent the essays still. share some important common features, Modeling wise each of them relies on a microfounded dynamic stochastic general. equilibrium DSGE model Macroeconomics has changed substantially after 1976. when Lucas published his in uential paper on the Lucas critique 1 He pointed. out that the estimated relations in reduced form macroeconometric models were. in uenced by the particular economic policy rule in use Hence such models could. not be used for policy analysis as rational agents would update their expectations. and change their behavior in response to changes in policy rules A new generation. of macroeconomic models immune to the Lucas critique was born Key ingredients of. this emerging literature were rational expectations and sound microfoundations i e. individual behavior is derived from an explicit optimization problem The models. presented in this thesis satisfy this requirement, The economies described in chapter 2 and chapter 4 deal with heterogenous.
rather than representative agents A recent strand of the macroeconomic literature. has studied the e ects of departures from the representative agent paradigm on. See Lucas 1976,2 Chapter 1 Introduction, phenomena such as asset prices welfare and wealth inequality The model in chapter. 2 proceeds along the lines of this literature and studies an economy where some agent. plan their portfolios or consumption more frequently than others while the model. in chapter 4 contains agents who di er in their discounting of the future. The last two chapters follow the new Keynesian tradition and handle micro. founded models with nominal rigidities stemming from monopolistic competition on. the supply side, Methodologically the models are solved with numerical methods and in the last. two chapters structurally estimated with methods that rely on Bayesian inference. As emphasized in Sims 1995 a stochastic model generates a whole distribution. rather than a single statistic Bayesian inference provides a framework for dealing. with the real nature of DSGE models Markov Chain Monte Carlo MCMC. methods make such inference computationally feasible because they allow us to. simulate the entire likelihood and measure di erent moments The pioneering work. by Smets and Wouters 2003 has shown the advantages of using Bayesian inference. to estimate a medium scale DSGE model Chapter 3 and 4 follow in their steps. In what follows I brie y summarize the content and results of each chapter. Inattentive Consumers in General Equilibrium Chapter 2 departs from a tradi. tional saving model by introducing heterogenous planning propensities among con. sumers The aim of the essay is to analyze what happens to wealth accumulation. and asset prices when a fraction of the population infrequently plan its consump. tion savings or stock holdings Recent empirical work on planning behavior2 has. shown a widespread lack of planning among young workers as well as people close to. retirement Moreover even though the phenomenon is prevalent among households. with low income and education some highly educated individuals also have a low. propensity to plan and only plan infrequently3 According to the same empirical lit. erature infrequent planning might explain wealth heterogeneity among households. with otherwise similar characteristics where households that plan infrequently also. hold lower wealth, In theory the propensity to plan could a ect wealth along di erent channels. For example infrequent planners may accumulate less wealth because they follow. myopic rule of thumb behavior because they have time inconsistent preferences or. See Lusardi 2003, In the sample of Ameriks Caplin and Leahy 2003 the majority of respondends holds a. Master s or higher university degree,Chapter 1 Introduction 3.
because they make di erent investment choices The evidence in Lusardi 2003 hints. that planning indeed a ects portfolio choice and that infrequent planners choose less. risky and pro table portfolios On the other hand the results in Ameriks Caplin. and Leahy 2003 and Venti and Wise 2000 suggest that di erences in saving rather. than nancial choices are at the origin of wealth dispersion among households with. the same characteristics Present bias preferences for example could turn infrequent. planners into overspenders, My essay shows that in a simple model economy populated by attentive and. inattentive agents where the latter plan their consumption only every other pe. riod inattentive consumers accumulate more wealth In general equilibrium inat. tentiveness a ects wealth inequality through two di erent channels which work in. opposite directions It increases wealth accumulation of the inattentive group via a. precautionary savings motive and decreases wealth accumulation via negative price. e ects Inattentive consumers face more uncertainty about the future since their. consumption becomes predetermined for some time which induces them to save. more for precautionary reasons but their bond holdings are negatively correlated. with asset returns Moreover asset prices are much more volatile in my model than. in a representative agent model with full attention Intuitively prices have to uc. tuate more because they must induce attentive consumers to voluntarily bear the. entire burden of adjusting to aggregate shocks, When the source uncertainty is asset returns rather than income infrequent re. vision of portfolios produces the opposite result consistently with the empirical. literature inattentive investors accumulate less wealth for reasonable levels of risk. Essays on Macroeconomics Daria Finocchiaro Stockholm University c Daria Finocchiaro Stockholm 2007 ISSN 0346 6892 ISBN 978 91 7155 465 9 Cover Picture Olle Baertling Agra 1959 Oil on canvas 97x195 Printed in Sweden by Intellecta Docusys Stockholm 2007 Distributor Institute for International Economic Studies Doctoral Dissertation Department of Economics Stockholm University Abstract

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