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Essays on Monetary and International
Macroeconomics
Inaugural-Dissertation
zur Erlangung des Doktorgrades
des Fachbereichs Wirtschaftswissenschaften
der Johann Wolfgang Goethe-Universit t
Frankfurt am Main
vorgelegt von
Adam Traczyk
aus Warschau
Frankfurt am Main 2011Contents
Contents 1
List of Figures 4
List of Tables 7
List of Original Papers 9
I Introduction 10
Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Zusammenfassung . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
II Research Papers 20
1 Unconventional Monetary Policy and Bank Supervision 21
1.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
1.2 The baseline model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
1.2.1 Households . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
1.2.2 Non-?nancial ?rms . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
1.2.3 Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
1.2.4 Central bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
1.3 Results. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
1.3.1 Calibration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
1.3.2 Impulse responses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
1.4 Experiments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
1.4.1 Perfect foresight of monetary policy . . . . . . . . . . . . . . . . . . 39
1.4.2 Unexpected change in monetary policy . . . . . . . . . . . . . . . . . 41
1.4.3 Estimation of the policy rule . . . . . . . . . . . . . . . . . . . . . . 44
1.5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
2 Financial Integration and the Term Structure of Interest Rates 47
2.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
12.2 Methodology and data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
2.2.1 Structure of the model . . . . . . . . . . . . . . . . . . . . . . . . . . 51
2.2.2 Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
2.2.3 Estimation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
2.2.4 Identi cation of shocks . . . . . . . . . . . . . . . . . . . . . . . . . . 61
2.3 Model properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
2.3.1 In-sample ?t . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
2.3.2 Expectation hypothesis tests . . . . . . . . . . . . . . . . . . . . . . 63
2.3.3 Term structure and exchange rate risk premium . . . . . . . . . . . 66
2.3.4 Dynamics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
2.4 Out-of-sample forecasts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
2.5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
3 Decoupling of Economies? Evidence from a Global VAR Analysis of
Regional Spillovers 76
3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
3.2 Methodology and data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
3.2.1 Structure of the model . . . . . . . . . . . . . . . . . . . . . . . . . . 81
3.2.2 Estimation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
3.2.3 Identi cation of shocks . . . . . . . . . . . . . . . . . . . . . . . . . . 86
3.2.4 Monte Carlo experiments . . . . . . . . . . . . . . . . . . . . . . . . 87
3.2.5 Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
3.3 Results. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
3.3.1 The mixed weights . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
3.3.2 Integration properties of the model . . . . . . . . . . . . . . . . . . . 94
3.3.3 Testing weak exogeneity . . . . . . . . . . . . . . . . . . . . . . . . . 95
3.3.4 Impact elasticities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
3.3.5 Generalized impulse responses . . . . . . . . . . . . . . . . . . . . . 96
3.3.6 Generalized forecast error variance decomposition . . . . . . . . . . 100
3.4 Counterfactual analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102
3.4.1 Mixed weights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102
3.4.2 Financial weights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103
3.4.3 Shutdown of transmission channels . . . . . . . . . . . . . . . . . . . 105
3.5 Time-varying weights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106
3.6 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108
Bibliography 110
A Appendix to Chapter 1 119
A.1 First order conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119
A.1.1 Households . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119
A.1.2 Non-?nancial ?rms . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119
2A.1.3 Deposit banks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120
A.1.4 Lending banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120
A.2 Tables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121
A.3 Figures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126
B Appendix to Chapter 2 129
B.1 Bond prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129
B.2 Tables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130
C Appendix to Chapter 3 132
C.1 Tables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132
C.2 Figures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149
3List of Figures
1.1 Responses to positive quantitative monetary easing shock to lending banks. . . . . 33
1.2 Responses to positive quantitativey easing shock to ?rms. . . . . . . . . 34
1.3 Responses to positive qualitative monetary easing shock to lending banks.. . . . . 35
1.4 Responses to positive capital shock to lending banks. . . . . . . . . . . . . . . . 37
1.5 Responses to positive deposit tax shock. . . . . . . . . . . . . . . . . . . . . . . 38
1.6 Prior and posterior distributions. . . . . . . . . . . . . . . . . . . . . . . . . . . 44
2.1 In-sample ?t of the yield curve from the VECX a¢ ne term structure model. . . 63
2.2 In-sample?toftheyieldcurvefromthe VECX a¢ netermstructuremodelwith
the yield spread. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
2.3 Campbell-Shiller regression results for the model implied data. . . . . . . . . . . 66
2.4 Impulse responses of macro factors to a negative one standard error shock to do-
mestic GDP, with 68% con?dence bands. . . . . . . . . . . . . . . . . . . . . . 69
2.5 Impulse responses of yields to a negative one standard error shock to domestic
GDP, with 68% con dence bands. . . . . . . . . . . . . . . . . . . . . . . . . . 70
2.6 Impulseresponsesofmacrofactorstoapositiveonestandarderrorshocktoforeign
short term interest rate, with 68% con dence bands. . . . . . . . . . . . . . . . . 71
2.7 Impulse responses of yields to a positive one standard error shock to foreign short
term interest rate, with 68% con?dence bands. . . . . . . . . . . . . . . . . . . . 72
3.1 Direction of interdependencies over time, based on trade weights. . . . . . . . . . 93
3.2 Direction of interdependencies over time, based on ?nancial weights. . . . . . . . 94
3.3 Impulse responses to a negative one standard error shock to US GDP with 95%
con?dence bands. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
3.4 Impulse responses to a negative one standard error shock to US GDP with 95%
con?dence bands. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108
A.1 Responses to positive technology shock. . . . . . . . . . . . . . . . . . . . . . . 126
A.2 Responses to expansionary monetary policy shock. . . . . . . . . . . . . . . . . . 127
A.3 Responses to positive quantitative monetary easing shock to deposit banks. . . . . 127
A.4 Responses to positive qualitative monetary easing shock to deposit banks. . . . . . 128
A.5 Responses to positive capital shock to deposit banks. . . . . . . . . . . . . . . . 128
4C.1 IRFstoanegativeonestandarderrorshocktoUSequitywith68%con?dencebands.149
C.2 IRFs to a negative one standard error shock to US GDP with 68% con dence bands. 149
C.3 IRFstoapositiveonestandarderrorshocktoUSinterestratewith68%con dence
bands. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150
C.4 IRFs to a negative one standard error shock to US equity using mixed weights
from the beginning of the sample. . . . . . . . . . . . . . . . . . . . . . . . . . 150
C.5 IRFs to a negative one standard error shock to US equity using mixed weights
from the middle of the sample. . . . . . . . . . . . . . . . . . . . . . . . . . . . 151
C.6 IRFs to a negative one standard error shock to US equity using mixed weights
from the end of the sample. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151
C.7 IRFstoanegativeonestandarderrorshocktoUSequityusingtrade-basedweights
from the beginning of the sample. . . . . . . . . . . . . . . . . . . . . . . . . . 152
C.8 IRFstoanegativeonestandarderrorshocktoUSequityusingtrade-basedweights
from the middle of the sample. . . . . . . . . . . . . . . . . . . . . . . . . . . . 152
C.9 IRFstoanegativeonestandarderrorshocktoUSequityusingtrade-basedweights
from the end of the sample. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153
C.10 IRFs to a negative one standard error shock to US real GDP using mixed weights
from the beginning of the sample. . . . . . . . . . . . . . . . . . . . . . . . . . 153
C.11 IRFs to a negative one standard error shock to US real GDP using mixed weights
from the middle of the sample. . . . . . . . . . . . . . . . . . . . . . . . . . . . 154
C.12 IRFs to a negative one standard error shock to US real GDP using mixed weights
from the end of the sample. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154
C.13 IRFs to a negative one standard error shock to US real GDP using trade-based
weights from the beginning of the sample. . . . . . . . . . . . . . . . . . . . . . 155
C.14 IRFs to a negative one standard error shock to US real GDP using trade-based
weights from the middle of the sample. . . . . . . . . . . . . . . . . . . . . . . . 155
C.15 IRFs to a negative one standard error shock to US real GDP using trade-based
weights from the end of the sample. . . . . . . . . . . . . . . . . . . . . . . . . 156
C.16 IRFstoapositiveonestandarderrorshocktoUSinterestrateusingmixedweights
from the beginning of the sample. . . . . . . . . . . . . . . . . . . . . . . . . . 156
C.17 IRFstoapositiveonestandarderrorshocktoUSinterestrateusingmixedweights
from the middle of the sample. . . . . . . . . . . . . . . . . . . . . . . . . . . . 157
C.18 IRFstoapositiveonestandarderrorshocktoUSinterestrateusingmixedweights
from the end of the sample. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157
C.19 IRFs to a positive one standard error shock to US interest rate using trade-based
weights from the beginning of the sample. . . . . . . . . . . . . . . . . . . . . . 158
C.20 IRFs to a positive one standard error shock to US interest rate using trade-based
weights from the middle of the sample. . . . . . . . . . . . . . . . . . . . . . . . 158
C.21 IRFs to a positive one standard error shock to US interest rate using trade-based
weights from the end of the sample. . . . . . . . . . . . . . . . . . . . . . . . . 159
C.22 IRFs to a negative one standard error shock to US equity. . . . . . . . . . . . . . 159
5C.23 IRFs to a negative one standard error shock to US equity. . . . . . . . . . . . . . 160
C.24 IRFs to a negative one standard error shock to US real GDP. . . . . . . . . . . . 160
C.25 IRFs to a negative one standard error shock to US real GDP. . . . . . . . . . . . 161
C.26 IRFs to a positive one standard error shock to US interest rate. . . . . . . . . . . 161
C.27 IRFs to a positive one standard error shock to US interest rate. . . . . . . . . . . 162
C.28 IRFs to a negative one standard error shock to US equity. . . . . . . . . . . . . . 162
C.29 IRFs to a negative one standard error shock to US real GDP. . . . . . . . . . . . 163
C.30 IRFs to a positive one standard error shock to US interest rate. . . . . . . . . . . 163
6List of Tables
1.1 GDP and consumption loss for a model with endogenous solvency rates . . 40
1.2 GDP and consu loss for a model with endogenous solvency rates . . 41
1.3 GDP and consumption loss for a model with endogenous solvency rates
with zero-bound on the policy rate . . . . . . . . . . . . . . . . . . . . . . . 42
2.1 ADF-GLS unit root test results . . . . . . . . . . . . . . . . . . . . . . . . . 60
2.2 Results of F-tests for weak exogeneity . . . . . . . . . . . . . . . . . . . . . 60
2.3 Campbell-Shiller regression results for the sample data . . . . . . . . . . . . 65
2.4 GFEVD: a negative one standard error shock to domestic GDP . . . . . . . 70
2.5 a positive one standard error shock to foreign short term interest
rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
2.6 Out-of-sample term structure forecasts . . . . . . . . . . . . . . . . . . . . . 73
2.7 Term structure ?t . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
2.8 Out-of-sample term structure forecasts for the closed economy model . . . . 74
A.1 GDP and consumption loss for a model with exogenous solvency rates . . . 121
A.2 GDP and consu loss for a model with no interbank market and
endogenous solvency rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122
A.3 GDP and consumption loss for a model with exogenous solvency rates . . . 123
A.4 Calibrated parameter values . . . . . . . . . . . . . . . . . . . . . . . . . . . 123
A.5 Steady state values . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124
A.6 Second moments (model with endogenous default rates and no leverage ratio)124
A.7 Prior and posterior distributions of parameters and shocks . . . . . . . . . . 125
B.1 Autoregressive distributed lag models . . . . . . . . . . . . . . . . . . . . . 130
B.2 Tests of structural change . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131
C.1 Lag order in country-speci?c models . . . . . . . . . . . . . . . . . . . . . . 132
C.2 Unit root test results for global common variable (oil price index) . . . . . . 133
C.3 ADF-GLS unit root test results for domestic variables . . . . . . . . . . . . 134
C.4LS unit root test results for country-speci c foreign variables . . . . 135
C.5 Results of F-tests for weak exogeneity . . . . . . . . . . . . . . . . . . . . . 136
C.6 Contemporaneous e⁄ects of foreign variables on their domestic counterparts 137
7C.7 Number of cointegrating relations for di⁄erent weighting schemes . . . . . . 138
C.8 GFEVD: a negative standard error unit shock to US real equity prices . . . 139
C.9 ae standard error unit shock to US real GDP . . . . . . . 140
C.10 GFEVD: a negative standard error unit shock to US interest rate . . . . . . 141
C.11 GFEVD with di⁄erent weighting schemes: a negative standard error unit
shock to US real equity prices . . . . . . . . . . . . . . . . . . . . . . . . . . 142
C.12 GFEVD with di⁄erent weighting schemes: a negative standard error unit
shock to US real GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143
C.13 GFEVD with di⁄erent weighting schemes: a negative standard error unit
shock to US interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144
C.14 Countries and regions (MSCI) . . . . . . . . . . . . . . . . . . . . . . . . . . 145
C.15 Countries and (IMF) . . . . . . . . . . . . . . . . . . . . . . . . . . 146
C.16 Monte Carlo results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147
C.17 Tests of structural change . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147
C.18 Autoregressive distributed lag models . . . . . . . . . . . . . . . . . . . . . 148
8