Skip to main content
Open Access Publications from the University of California

Essays in Macroeconomics and Finance

  • Author(s): Khramov, Vadim
  • Advisor(s): Farmer, Roger E
  • et al.

The first chapter proposes a method for solving and estimating linear rational expectations models that exhibit indeterminacy. The method implements an idea of moving expectational errors to the set of fundamental shocks, reducing the number of solutions from infinity to one. This transformation allows one to treat indeterminate models as determinate and, therefore, apply standard solution and estimation methods to them. This chapter provides a simple "rule of thumb," based on a Bayesian model comparison, for identifying expectational errors that generate indeterminacy.

The second chapter reexamines the source of the Great Moderation by estimating New-Keynesian DSGE models with capital accumulation and indeterminacy on U.S. data from 1960 to 2008. It was found that, in contrast to canonical papers, the Federal Reserve's monetary policy rule remained passive in response to inflation before (1960-1979) and after (1982-2008) the Great Moderation. Bayesian model comparisons enable a declaration that, when capital is added, passive monetary policy with indeterminacy provides a better fit to the data in both subperiods. The results of this chapter suggest that during the Great Moderation structural changes were primarily on the demand side of the economy, supporting the idea of financial innovations.

The third chapter sheds light on a narrow but crucial question in finance: What should be the parameters of a model of the short-term real interest rate? In this chapter, parameters of the real interest rate model are estimated in the broad class of single-factor interest rate diffusion processes on U.S. monthly data. It is shown that the elasticity of interest rate volatility--the relationship between the volatility of changes in the interest rate and its level--plays a crucial role in explaining real interest rate dynamics. The empirical estimates of the elasticity of the real interest rate volatility are found to be about 0.5, much lower than that of the nominal interest rate. These estimates show that the square root process, as in the Cox-Ingersoll-Ross model, provides a good characterization of the short-term real interest rate process.

Main Content
Current View