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Title: The macroeconomic effects of fiscal and monetary policies
Author: Almeida, Marcelo
Awarding Body: University of Surrey
Current Institution: University of Surrey
Date of Award: 2017
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This dissertation consists of three main chapters which investigate the economic implications of monetary and fiscal policies on the macroeconomy. The first main chapter examines the effects of government spending and tax revenue shocks on various macroeconomic aggregates. There is a consensus among academics and practitioners that output reacts positively to fiscal stimulus, but the effects on private consumption, real wage, exchange rate and trade balance are still a matter of debate in both theoretical and empirical literature. In this study, I provide new empirical evidence that may rationalize these disagreements by estimating the effects of government spending and tax shocks on macroeconomic aggregates using vector autoregression model for two industrialized open economies, the United States and the United Kingdom. I show that the recursive and Blanchard-Perotti identification approaches yield similar responses for both economies, but the responses computed under the sign restriction method differs in the short-term. In addition, this study proposes a robust and novel identification specification for open economy variables, namely trade balance and exchange rate. As ancillary analysis, this study finds that (i) government spending yields higher output multiplier compared to tax cuts, and (ii) some of the fiscal stimulus for an open economy is leaked to its trading partners via the trade channel. Finally, I provide additional empirical evidence to the current literature by showing that the effects of government spending shocks on output have weakened in the post-1980s. The second chapter aims to examine the drivers of exchange rate movements and how it affects inflation by evaluating the temporal interrelations between real exchange rate and macroeconomic variables. Understanding what drives exchange rates dynamics is instrumental for both academics and policymakers as they significantly affect a country's trade competitiveness, influence exports, imports, and overall output growth. The exchange rate affects the prices of imported goods and services, which feeds through domestic consumer prices, ultimately determining consumer's purchasing power. Movements in the exchange rate can make it costly (or cheaper) to service foreign denominated debt and can have a substantial impact on foreign investments earnings. In this study, I provide empirical evidence - from a Bayesian time-varying parameter vector autoregression model with stochastic volatility - that real exchange rate movements and volatility increased over time following a monetary policy shock. The simulation results - from the standard two-country New Keynesian dynamic stochastic general equilibrium model -- suggest that price rigidities, exchange rate pass-through, degree of openness to trade, and monetary policy response to inflation and output growth drive most of the movements in the real exchange rate, whereas changes in its volatility can be mainly attributed to feasible calibrations of nominal rigidities and home bias. Finally, the third chapter focuses on the spillovers and spillbacks of monetary policy. On the onset of the Global Financial Crisis, central banks aimed to promote price stability and domestic economic growth by engaging in expansionary monetary policy, which led to significant interest rate differentials between advanced economies and emerging economies. Foreign policymakers, in particular in emerging countries, criticized the Federal Reserve of deliberately weakening the dollar to gain an advantage in trade. Despite a large body of literature in this field, the following question about monetary policy spillovers remain open: Is expansionary monetary policy beggar-thy-neighbor or boost-thy-neighbor? In this study, I show that international trade spillovers of monetary policy in the United States substantially change over time, with a monetary policy tightening leading to more adverse international spillovers during recessions. Using a combination of empirical and theoretical tools, this study documents these findings and explains that during economic downturns, a decline in the trade elasticity and a lower exchange rate pass-through to import prices cause the U.S. trade balance to increase following a monetary policy tightening, despite the appreciation of the U.S. dollar. This occurs through a reduction of the expenditure switching effect. In turn, this lowers foreign GDP. In good times, in contrast, the trade spillovers to the foreign economy following a monetary policy tightening in the United States tend to be favorable and support foreign economic growth. The degree in which countries trade and the extent to which exchange rate movements are reflected in import prices are therefore crucial for the international spillovers and spillbacks of monetary policy. Variation in these key spillovers parameters can explain more generally why the international transmission of monetary policy in the United States changes over time.
Supervisor: Gabriel, Vasco ; Cantore, Cristiano Sponsor: School of Economics, University of Surrey
Qualification Name: Thesis (Ph.D.) Qualification Level: Doctoral
EThOS ID:  DOI: Not available