In a standard New Keynesian model, the central bank moves the real rate when it changes the nominal interest rate since the price level responds sluggishly to change in nominal rates due to nominal rigidity. Monetary policy is non-neutral, for it moves the real rate, thus alters agents’ intertemporal consumption decisions. The standard model is a simplified world without information frictions or regional heterogeneity. In a world with information frictions, monetary policy actions communicate to the public about the central bank’s private information. Monetary policy can generate additional effects by shaping agents’ beliefs about the true state of the economy or the future monetary policy path. In a world with regional heterogeneity, monetary policy can have interesting interactions with local characteristics. This dissertation investigates regime-dependent, state-dependent, and heterogeneous regional effects of monetary policy.

Chapter 1 introduces a new regime dependence of monetary policy due to information frictions: the effects of monetary policy shocks depend on the type of the fundamental macro shock in the economy. Specifically, output responses to monetary policy shocks are amplified relative to their counterparts in perfect information models when the fundamental macro shock is a productivity level shock or a demand shock. In contrast, output responses are dampened when the fundamental macro shock is a productivity growth rate shock. Households observe the overall fundamental in the economy but cannot distinguish its persistent part from its temporary part. The central bank sets the interest rate tracking a function of the persistent fundamental plus a monetary policy shock, so the interest rate is a noisy signal about the persistent fundamental with the monetary policy shock as the noise. Exogenous monetary policy shocks lead households to update their perceptions about the persistent fundamental differently facing varying types of fundamental macro shocks, thus generating heterogeneous effects on output.

Chapter 2 introduces the position effect: the effects of a monetary policy shock depend on its relative position in the monetary policy sequence. I use both event study and local projections methods to investigate how the effects of monetary policy depend on the relative position of monetary policy shocks in monetary policy sequences. The effects of monetary policy are less potent in the first half of monetary policy sequences, which I phrase as the position effect. Possible explanations include different implicit forward guidance, different information effects, and Fed's different interest rate smoothing behavior at different positions in the monetary policy sequence. I provide supporting evidence for the interest rate smoothing behavior: less interest rate smoothing in the first half of a monetary policy sequence shortens the shock duration, thus weakening the effect.

Chapter 3, joint work with Ninghui Li, investigates the regional heterogeneity of monetary policy on local house prices. House prices in growing urban areas are more sensitive to monetary policy. We first define urban growth and urban decline using CBSA level population data and then test local house prices to monetary policy shocks using local projections. The housing supply elasticity does not drive our results, although it plays a role in house price dynamics. We find evidence supporting that the effect of monetary policy interacts with the long-run expectations driven by local population growth.

This dissertation collects three essays on two hotly debated policy questions during and after the COVID-19 pandemic. Coupled with elevated uncertainty and falling confidence, the pessimism about future productivity and growth had dramatically discouraged business investment before the Great Lockdown. It has been widely accepted that heterogeneity matters for understanding the propagation of business cycles and how to target any policy intervention, but little is known about how firm heterogeneity matters in the propagation of expectation driven business cycles, i.e., cycles driven by news about future fundamentals.

In the first chapter, I use U.S. firm-level data from Compustat combined with identified news shocks from Structural VAR analysis to empirically study the heterogeneous responses of firms' capital accumulation following the sudden arrival of news about future technology. I find that non-dividend payers that are younger, smaller, with lower leverage, higher liquidity, or lower cash flow respond the most to news shocks over a five-year horizon. After taking into account the correlation among different characteristics, liquidity, age, and cash flow remain powerful in predicting the heterogeneity in firm investment. Besides, I also provide suggestive evidence on the transmission mechanism of technology news shocks to investment dynamics through the impact on firm finance. Contrary to the previous macro-level evidence, I find a very limited and short-lived increase in firms' market values and share prices following good news. In contrast, firms' book values respond more persistently and prominently. The borrowing of long-term debts responds significantly more for younger, smaller, less indebted, and more liquid firms. The cash flow channel is less important in explaining the heterogeneity in investment response as the response in sales or earnings is short-lived and more homogeneous across firms. Thanks to the massive policy measures put forward by both fiscal and monetary authorities in the last couple of years, the pandemic recession turned out to be short. But U.S. inflation soon hit a four-decade high record in June 2022 even though the Federal Reserves had taken increasingly bigger steps to raise interest rates. The effectiveness of monetary policy to stabilize inflation greatly depends on the trade-off between inflation and economic slack. While numerous scholars have documented a weaker trade-off, known as the flattening of the Phillips curve, the precise reasons behind the change are still under debate. In the second chapter, I provide a new explanation and study the state dependence of the slope of the Phillips curve on the trend productivity growth. By merging two longitudinal databases, I present estimates of the ``average'' New Keynesian Phillips curve (NKPC) for 17 advanced economies across TFP growth regimes since 1890. Following the state-of-the-art method, I estimate the NKPC using trilemma monetary shocks as instruments and find that the Phillips curve is steeper (flatter) in the high (low) growth regime. My empirical finding is consistent with the following mechanism: the structural changes that contribute to higher productivity growth could also result in a more competitive market, increasing the price elasticity of demand so that the pass-through of marginal costs from short-run demand changes is larger. This mechanism is qualitatively in tune with the recent trends of a flattening Phillips curve and productivity slowdown amid rising market concentration in major advanced economies. The policy implication is that structural reforms that can improve productivity and restore business dynamism help enhance the potency of monetary policy to stabilize inflation in the long run.

Despite decades of research, the consistent estimation of the Phillips curve remains one of the most challenging empirical tasks in macroeconomic studies due to pervasive endogeneity issues. In Chapter 2, I adapted the two-step approach proposed by Barnichon and Mesters (2020) in the estimation of the NKPC and imposed useful restrictions to improve point estimates. In the final chapter, I provide my justification by comparing the simulation performance of different estimators using monetary shocks as instruments. I show that the flexibility of the two-step approach to allow for extra controls in estimating the impulse responses gains its additional advantage over the other IV estimators and imposing range inequality constraints along with long-run restriction brings the point estimates closer to their true values when the rank condition fails. Nevertheless, the state-of-the-art method might be confronted with other pitfalls in the estimation of the Phillips curve, such as the many weak instruments problems and small sample bias, which deserve further research.

This dissertation is a compilation of three essays focusing on the following topics: understanding the heterogeneous effects of corporate tax policy on businesses, understanding how tax policy influences the effectiveness of monetary policy, and exploring asymmetric effects of monetary policy. In doing so, I draw on frontier methods in quasi-experimental design paired with rich micro-level datasets that allow me to study the effectiveness of aggregate policy measures. I also complement my empirical tools with theoretical models to pin down transmission mechanisms.

The first chapter examines the impact of corporate tax policy in altering the efficacy of monetary policy. In recent decades there has been much focus in the macroeconomics literature on understanding heterogeneous effects of monetary and fiscal policy. Although numerous empirical studies have explored monetary policy transmission via various financial and non-financial factors, the theoretical frontier has continuously highlighted that separate analysis of monetary and fiscal policy may overlook important policy interactions. In this chapter, I use narratively-identified variation in marginal tax reforms in the US and show that the average impact of monetary policy depends on preceding corporate tax changes. Specifically, I find that monetary policy is more effective on employment, sales and investment for firms facing an increase in the statutory rate relative to thosewith stable statutory tax rates. Moreover, I document that monetary policy is least effective on firms that received marginal tax cuts. The empirical findings are rationalized using a New Keynesian model featuring capital and corporate taxes. The theoretical model and empirical results demonstrate that tax shifts may significantly amplify or dampen the effectiveness of monetary policy.

The second chapter of my dissertation analyzes post-WWII US corporate tax policy changes. This is part of joint work with James Cloyne and Paolo Surico, where we build two new proxies on marginal tax rate and investment tax credits and investigate the causal effects of corporate tax changes on business investment dynamics. We find that both marginal tax rates and investment tax credits are tools genuinely effective across the firm distribution, yet on average marginal tax rate changes are more effective at raising firms’ investment rates than investment tax credits. Exploiting micro-level heterogeneity, we also show that small, low-leverage, and high-growth firms are more sensitive to corporate tax policy changes, which suggests that firm characteristics may have a role in propagating the effectiveness of these tax tools. Overall, our findings provide a comparison of the two most common tools used in corporate tax policy and highlight the role of firm characteristics in studying US corporate tax policy.

Lastly, Chapter 3 documents the first micro-level evidence on the asymmetric effects of monetary policy in the US. Various studies on monetary transmission literature have documented non-linear effects of monetary policy at the aggregate level. However, there are few studies that use micro-data to explore sign-dependent monetary effectiveness at the disaggregate level. Focusing on firm-level data from 1980q3 to 2016q3, I find that monetary contractions have larger effects on firm-levelemployment, investment and sales than monetary expansions. These results are consistent with the aggregate findings in the literature and are robust to sample selection, sector-level analysis and alternative monetary policy shocks. Furthermore, I examine the role of financial characteristics in propagating the asymmetric effects of monetary policy. My findings show a larger employment and investment response to a monetary tightening for firms with small size, low leverage, high liquidity or no-dividend paying status. For the employment results, I also find firms with low leverage or high liquidity to respond more to monetary expansions; however, this effect is much weaker as compared to monetary contractions. These results provide evidence that financial characteristics have a role in propagating the asymmetric effects of monetary policy.

Monetary and fiscal policies are two main tools to steer the economy. How they are or will be implemented affects the private sector’s behavior and expectation about the future, thus the macroeconomic dynamics. In this thesis, I study the monetary and fiscal policies recently introduced in reality or documented empirically. Chapter 1 studies the nonlinear properties of average inflation targeting(AIT) and explores how those affect the fiscal multiplier. Chapter 2 estimates state-dependent fiscal multipliers. Instead of widely used states, such as business cycles or zero lower bound(ZLB) episodes, I estimate them conditional on the credit cycle. Chapter 3 investigates the effects of negative interest rate policy(NIRP) expectation on the fiscal multiplier.Chapter 1 shows that it matters how to solve the model both with AIT and with occasionally binding ZLB. When the model is solved based on the first-order perturbation method in a piecewise linear fashion, the social welfare increases as the averaging window lengthens, which is in line with the conventional wisdom. On the contrary, if the model is solved fully nonlinearly, the social welfare starts decreasing beyond the medium window length, in our baseline case, a 6-year window, while it rises steadily up to that threshold. With the longer window AIT, the agents expect a much looser policy when ZLB is binding, which results in less possibility of binding constraint through the high inflation expectation. This effect becomes stronger under a longer window AIT so that average inflation gets higher than the target. For the monetary authority to meet the target, it raises the rates in the longer window AIT, unlike the shorter window AIT. These opposite reactions increase social welfare up to a 6-year window but generate lower welfare beyond that. This property also Hyundo Joo June 2022 Economics affects the fiscal multipliers under AITs with different window lengths both outside the ZLB and at the ZLB. Chapter 2 demonstrates that the credit data anticipate the government spending shocks identified without controlling the credit market. To circumvent this problem, the shocks are extracted with real credit data as well as conventional real variables. Using this new series of shocks, I provide new evidence on the effects of unexpected changes in government spending conditional on the credit cycle. The on-impact output multiplier is 1.85 in the credit recession and 0.92 outside the recession. Since the credit cycle defined is not much overlapped with the business cycle, the results seem not driven by business cycle dependency. In addition, the results are robust to alternative model specifications. Finally, Chapter 3 finds that the fiscal multiplier decreases nonlinearly as the private sector anticipates the implementation of NIRP more in the future. While the on-impact fiscal multiplier at the ZLB is 1.5 without any expectation about NIRP, it falls below 1 when the agents expect the economy to switch the NIRP in two quarters, on average. This result is not derived from the fact that the fiscal multiplier under NIRP is smaller than one. In fact, in the baseline simulation, it is still higher than the unity, 1.52. This shows that the possibility of NIRP (or, more broadly speaking, much looser policies) mitigates the size of the fiscal multiplier at the ZLB, and that effect is nontrivial.

In this dissertation, I explore the relationship between firm market power and the conduct of monetary policy. The interaction of market power and monetary policy is at the heart of the New-Keynesian literature, yet there remain many unresolved puzzles that call for further investigation both empirically and theoretically. I work at the intersection of empirical research and theory, and I aim to answer policy-relevant questions using micro-data in light of theoretical models.

In Chapter I, I study the role of intangible inputs, such as software and marketing, and firm heterogeneity in productivity in determining how firms' price-cost markups respond to interest rate changes. In a standard sticky-price New-Keynesian (NK) model, conditionally counter-cyclical markups (i.e., markups fall conditional on a monetary easing) play a key role in the transmission of monetary policy to the real economy. Recent empirical evidence, however, finds that markups respond pro-cyclically to interest rate changes. This disconnect between theory and data casts doubt over the potency of this monetary transmission mechanism and raises the following questions: (1) What causes the pro-cyclical response of markups following a monetary policy shock? (2) What are the implications for the transmission of monetary policy to inflation?

To address these questions, I first examine the cyclical behaviors of firm-level markups with the goal to identify what characterizes the firms that drive the aggregate response. I find that firm-level markups are conditionally pro-cyclical to a monetary easing, consistent with earlier findings based on aggregate data. I find new evidence that firms that intensively use intangible inputs display more pro-cyclical markups. Motivated by the empirical evidence, I propose a novel mechanism through firms' adoption of intangible inputs to show that in a heterogeneous firms NK model, firms can reproduce pro-cyclical markups following a monetary easing. I test key predictions of the model and find empirical support for this mechanism. In the cross-section, as in the data, larger firms with higher market share adopt intangible inputs aggressively and become even larger and more profitable at the expense of smaller firms. These results run contrary to the conventional wisdom that a monetary easing leads to a strong labor market with shrinking profit margins and rising wages such that inflation is driven by rising costs, and a distributional consequence that benefits the workers. My findings suggest that a monetary easing could induce inflation driven by both rising costs and rising profits margins, and that it could lead to a redistribution of income from workers to firm profits.

Chapter II is part of joint work with Sanjay R. Singh. We study the business cycle interaction of monetary policy with TFP growth and product market power. We document a novel channel for monetary policy to affect the allocative efficiency of an economy, i.e., how resources are allocated across firms. The channel operates through the extensive margin of firm entry and incumbent innovation. In a textbook NK model, markup dispersion goes up irrespective of whether the shock is contractionary or expansionary. In our setting, markup dispersion can go down with expansionary monetary policy shocks. Our misallocation channel does not depend on heterogeneous pass-through of marginal costs into price. We show that even when the pass-through is the same for all firms, monetary policy could still have misallocation effects through it impacts on the cross-sectional distribution of market power across firms.

Specifically, we incorporate incumbent innovation into a endogenous growth model with nominal rigidities. In the model, firms accumulate market power through incumbent innovation over time. Successful innovation by entrants results in displacement of existing firms, and disrupts the accumulation of market power by the incumbents. A cross-sectional distribution of markups endogenously responds to business cycle shocks through variations in both entrant and incumbent innovation. Using this environment, we show that a monetary tightening causes an increase in markup dispersion across firms by discouraging entrant innovation relative to incumbent innovation. Using external instruments, we find empirical support for increased inter-sectoral dispersion in markups, lower aggregate TFP, and lower firm entry following contractionary monetary policy shocks in the US economy.

Lastly, chapter III is joint with Troy Matheson, in which we empirically investigate the extent to which Canada's road infrastructure gaps have held back productivity. We merge firm-level productivity estimated with detailed road network GIS data from Statistics Canada to estimate productivity improvement with respect to reductions in minimal travel time from marginal improvements in road network. We find that road network improvements increase firm-level productivity. A 1% increase in accessibility leads to a 0.3-0.5% increase in firm productivity.

This dissertation is an empirical investigation of the effects of fiscal policies in the U.S. Two fiscal policies are covered. The first two chapters examine the distributional effects of income tax changes. In the third chapter, I investigate the effects of mean-tested transfers on local economic activity.

The literature on the effects of taxes on output has consistently established that an income tax cut has expansionary effects on the GDP. Yet, it is not clear how these gains in GDP are distributed across households. The first chapter looks at the big-picture question of how cuts in the average tax rate affect income and consumption inequality. To provide a causal interpretation of their effect, I build on the narrative tax changes literature to isolate income tax changes in the US that are unrelated to contemporaneous economic conditions. I study the effects of policy-induced changes in federal tax liabilities using Romer and Romer (2010) and Mertens and Ravn (2013)'s narrative-identified shocks for average income taxes in the U.S. I compute quarterly level Gini indexes from the Consumer Expenditure Survey and find that an average tax cut of one percentage point increases inequality in gross and disposable income by twelve percent and consumption inequality by seven percent, as measured by Gini indexes, a year after the cut. I find that increases in the labor supply at intensive margins in top income quintiles can explain the persistence of income inequality. My analysis also provides some policy implications: policies that cut top marginal tax rates do not increase the bottom 60% of incomes in the medium term, and tax cuts and tax increases do not have symmetric effects on income inequality.

Given that oftentimes a fiscal reform modifies the marginal tax for different income brackets, I look at the spillover effects of the average marginal tax rates across income percentiles in the second chapter. I analyze the spillover effects of top marginal tax cuts on bottom income groups and vice-versa using Mertens and Montiel Olea (2018)'s counterfactual marginal tax rates as instruments. I present new short-run cross elasticities of taxable income and examine income dynamics after five years of a marginal tax cut. I find that “trickle-down” effects are only concentrated on the top incomes: a tax cut in the top 1% only increases income in the short run for the top decile. In contrast, a tax cut in the bottom 90% increases income in the top decile after four years.

Finally, given the theoretical equivalency between income tax cuts and increases in transfer payments, in the third chapter, I examine whether changes in means-tested transfers affect local economic activity. I study the case of a plausible exogenous permanent change in the generosity of housing vouchers in 2005. I leverage adjustments to generosity thresholds that can be attributed to measurement errors from rent estimates. I show these adjustments are unrelated to past local economic trends and use the geographical variation across MSAs in the U.S. to instrument changes in housing transfers. I find that a 1% increase in the MSA average housing transfer decreases the proportion of income that voucher holders spend on rent by 0.05 percentage points and increases the beneficiaries' household income by 1 percent. The effects on beneficiaries, however, do not seem to have meaningful general equilibrium effects, as the effects on GDP and personal income per capita at the MSA level cannot be distinguished from zero.