UC Irvine

This dissertation is a study of how government actions can impact the macroeconomy under different circumstances. In Chapter 1, I examine the impacts from political conflict and violence in several empirical frameworks. Using generalized least squares, I find that higher levels of magnitude of violence lead to lower growth, investment, and standards of living. This result is further confirmed after running two-stage least squares regressions to address the concern of reverse correlation. I also apply a panel vector-autoregression (VAR) model to study the cross-country economic effects of a shock to the magnitude of political violence in three groups of countries that have had turbulent conflicts in the late 20th century. Findings from the panel VARs show that cross-country effects from a political violence shock are most significant when the countries share characteristics directly related to the cause of the conflict.

In Chapter 2 and 3, I pivot towards studying how the behavioral feature, "myopia", affects government policy in the U.S. economy. Chapter 2 investigates the impact of fiscal policy on economic stimulation within the context of agents who exhibit partial myopia, implying that households and firms are less forward-looking and attentive towards future events. This deviation from perfect rationality impacts the marginal propensity to consume, ultimately challenging the theory of Ricardian Equivalence. To address this, I emphasize the importance of introducing partially myopic agents into a new Keynesian model with hand-to-mouth consumers. I estimate the model using Bayesian MCMC methods to fit U.S. time series data between 1984-2019 under both determinacy and indeterminacacy. Under determinacy, partially myopic agents may result in higher fiscal multipliers but significantly crowd out private investment. Furthermore, the estimated myopia parameter is 0.86, which is in alignment with Gabaix (2020). However, the data suggets a preference for an indeterminate solution characterized by low degrees of myopia and a passive monetary policy.

Chapter 3 is an examination of how including myopia affects the conditions for a unique and stable equilibrium. I find that the inclusion has substantial effects on the determinacy of the model, where empirically founded values of hand-to-mouth consumers, reasonable degrees of myopia, and active monetary policy cannot all coexist.