UC San Diego

Chapter 1 suggests an efficient and simple regression-based approach for consistent estimation of dynamic effects of structural shocks in vector autoregressions (VAR) with proxy variables for the shocks. First, we show that the existing Proxy Structural VAR (Proxy-SVAR) approach using the proxy as an instrument variable yields a consistent estimator of the shape of the impulse-response function (IRF) if and only if the proxy does not have any direct forecasting ability in the VAR. Second, we prove that in the linear model, the shape of the IRF can be consistently estimated by adding the current and past values of the proxy variable in the VAR regardless of its direct forecasting ability or measurement error. Third, we show both theoretically and empirically that the formulation in Gertler and Karadi (2015) misestimates the effect of a monetary policy shock. Applying our unrestricted approach to GK's specification results in a substantially different conclusion from the Proxy-SVAR.

In Chapter 2, We build a Markov-switching structural VAR to estimate state-dependent government spending multipliers in the U.S. We show that the multipliers are statistically larger during recessions than during expansions. Our model has two features. First, we combine quantitative data and qualitative indicators to infer the regimes of the economy across which the multipliers differ. Second, we propose a recursive method to estimate IRFs that allows the economy to switch regimes after the shock. We argue that these two features are important for reconciling the main findings in previous studies.

Chapter 3 extends the Rosen-Roback spatial equilibrium model to show that increasing city-level college share affects welfare distribution by changing both wages and housing costs across individuals with different education levels. Using the PSID from 1980 to 2013, we confirm that high skilled workers gain greater benefits from living in cities with a rising college share, as the increase in their wage premiums outweighs their rent growth. However, earnings increase of the unskilled are completely offset by higher housing rents. In response influxes of college graduates, housing wealth also increases significantly more for college graduates, further widening the welfare gap.