Essays on Monetary Policy, International Macroeconomics, and Expectations
- Author(s): Ilabaca, Francisco Elias
- Advisor(s): Milani, Fabio
- Swanson, Eric T
- et al.
The primary contribution of my dissertation is to understand more about the role of expectations in the transmission of monetary policy within and between countries. In the first chapter of my dissertation titled "Measuring the Effects of US Unconventional Monetary Policy on International Financial Markets", I estimate and separately identify the effects of the US Federal Reserve's forward guidance and large-scale asset purchases on bond yields, stock indices, and exchange rates across countries. I identify these two monetary policy factors, namely forward guidance and large scale asset purchases, as in Swanson (2018), and show that they have substantial effects on a large panel of international bond yields, but these effects exhibit heterogeneity across countries and across maturities. I find small effects on exchange rates, and no effect on stock indices. I then employ a panel regression framework, with country and time fixed effects, to further explore the heterogeneity of this effect. I find for 5- and 10-year yields, bonds of emerging countries reacted more strongly to forward guidance, while industrial countries reacted more strongly to asset purchases. Across all the specifications, I find that industrial countries' 10-year yields had the largest estimated effect to expansionary monetary policy conducted via large scale asset purchases.
In the second chapter of my dissertation titled "Anchoring Japanese Inflation Expectations", I use survey and financial data to look at the movement in long run inflation expectations in Japan following the introduction of Abenomics and inflation targeting. I wrote this chapter throughout the course of my internship at the International Monetary Fund in 2018 under the supervision of Paul Cashin. Using a Nelson-Siegel framework, we combine firm level and professional forecaster data along with inflation swaps from financial markets to generate inflation expectations curves. Since it's a parametric approach, I am able to examine the behavior of the Level parameter, as a proxy for long run inflation expectations, following several rounds of unconventional monetary policy. The findings show that long run inflation expectations rose to around 1% following Bank of Japan actions between 2012 and 2017. In addition, inflation expectations became more invariant to movements in the CPI, which signals they are stabilizing. I conclude that while the Bank of Japan missed their target, inflation expectations seem to becoming "anchored" at 1%.
Finally, in the third chapter of my dissertation titled "Interest Rate Rules and Indeterminacy in an Estimated Open Economy Model", I estimate a small open economy model for Canada and the United States while allowing for equilibrium indeterminacy, to examine the role of sunspot shocks and self-fulfilling expectations in the transmission of shocks across the economies. Open economy considerations alter the conditions for a determinate equilibrium, yet traditional estimation approaches usually assume the equilibrium is always unique. My empirical results show that in a benchmark model, the data prefer a unique equilibrium. I consider two alternative specifications to the benchmark model. First, I employ an inflation forecast based rule to match the inflation targeting period for Canada, and find that the data prefer indeterminacy in this case, along with structural shocks that exhibit different dynamics. For example, now monetary policy and preference shocks are inflationary rather than deflationary. In the second extension, I introduce heterogeneous expectations into the benchmark model, and find that the data prefer adaptive agents over fully rational expectations, along with a unique equilibrium.