UC Irvine

This dissertation contains three chapters on impact and conduct of macroeconomic policy. Together the three chapters of this dissertation address important and timely issues in macroeconomic policy. Chapter 1 explores a new channel of short run transmission of fiscal policy under constraints of a monetary union. Chapter 2 looks into how unconventional monetary policy measures transmit to household consumption. In Chapter 3 I pivot from the impact of macroeconomic policy and look at the issue of credibility concerning the monetary policymakers in the US. In Chapter 1, I argue that fiscal policy is highly effective at stimulating output in countries via its impact on consumer sentiments. Using data for the European Economic and Monetary union, I provide evidence that the sentiments channel for fiscal policy is strongly present in peripheral European countries but absent in core countries. The impact of fiscal policy on consumer sentiments also make fiscal consolidation more costly in terms of output in peripheral countries. I validate my empirical findings using a New Keynesian model of currency union where agents form expectations based on non-fundamental factors (animal spirits) correlated with fiscal policy. I show the existence of a stronger response of output to fiscal policy through the latter's impact on consumer sentiments. Until recently, the effect of policy on confidence and expectations have largely only been discussed theoretically. However, surveys conducted by central banks and other academic organizations have allowed us to quantify what Keynes described as "animal spirits". The availability of empirical measures of sentiments gives us an opportunity to measure whether sentiments can transmit into real economic activity, and how macroeconomic policy can influence it. The contribution of this paper is to understand the role played by consumer sentiments, measured using the survey conducted by European Commission, in transmitting fiscal policy to the real economy. I study this question in the context of a currency union where the constraints on monetary policy allows fiscal policy to have a stronger influence within individual economies of the union. This paper provides empirical evidence on the role played by home mortgages in transmission of unconventional monetary policy. Using household level panel data on consumption, I show that the ability of households to refinance their mortgages and extract home equity, determines the efficacy of monetary policy in stimulating consumption. Homeowners who refinance their loan in response to an expansionary monetary policy shock consume more than other households. This heterogeneity is conditioned by local home prices. I find that mortgage owners who refinance their loan in states with higher house prices have higher consumption growth following an expansionary shock.

In Chapter 2, I look at the transmission of unconventional monetary policy shocks (Forward Guidance and Large Scale Asset Purchases) on household consumption. It has been well documented that monetary policy can have heterogeneous effect on households balance sheet. An expansionary policy can reduce inequality in the economy by reducing the real debt burden of borrowers. These facts have been established for conventional monetary policy where the central bank changes the policy rate. However, in the post 2008 world where policy rates in most countries hit the zero lower bounds, the importance of unconventional monetary policy gained cognizance. This paper attempts to document the impact of unconventional policy measures on household consumption. I specifically focus on the heterogeneous transmission of these policy on household consumption via the mortgage market. Using the consumer expenditure survey data, I find evidence that the channels of transmission of LSAP shock, in particular, vary across households depending on their decision to refinance their existing mortgages. An expansionary monetary policy lowers mortgage rates and allows homeowners to extract home equity via refinancing, resulting in higher disposable income. Higher disposable income converts into higher consumption for debt constrained households relative to homeowners who do not refinance, and households who do not own a house.

Chapter 3 looks at the market returns of investments by Federal Reserve board members to test whether Fed officials take advantage of superior information on interest rate paths to opportunely time their personal investments. Credibility in central banking institutions is key to effectiveness of monetary policy. However, the recent allegations have raised questions on well timed and large volume trades by some senior Fed officials in past couple of years. These allegations have also invited tighter regulations by the Federal Reserve on trades by officials. On average, we find no significant evidence of abnormal returns on trades by FOMC members compared to the average market. However, tighter restrictions and more transparent disclosures by Fed officials can help strengthen the credibility of the institution.