| Summary: | Doctor of Philosophy === Department of Economics === Steven P. Cassou === This dissertation consists of three essays in asymmetric empirical macroeconomics. Making macroeconomic policies has become increasingly difficult because of intricate relationships among macroeconomic variables. In this dissertation, we apply state-of-the-art macroeconometric techniques to investigate asymmetric relationships between key macroeconomic aggregates. Our findings have important macroeconomic policy implications.
An analogue to the Phillips curve shows a positive relationship between inflation and capacity utilization. Some recent empirical work has shown that this relationship has broken down when using data after the mid-1980s and several popular explanations for this changing relationship, including advancements in technology and globalization, were put forward as possible explanations. In the first essay, we empirically investigate this issue using several threshold error correction models. We find, in the long run, a 1% increase in the rate of inflation leads to approximately a 0.0046% increase in capacity utilization. The asymmetric error correction structure shows that changes in capacity utilization show significant corrective measures only during booms while changes in inflation correct during both phases of the business cycle with the corrections being stronger during recessions. We also find that, in the short run, changes in the inflation rate do Granger cause capacity utilization while changes in capacity utilization do not Granger cause inflation. The Granger causality from inflation to capacity utilization can be interpreted as supporting recent calls made in the popular press by some economists that it may be desirable for the Federal Reserve Bank to try to induce some inflation in an effort to stimulate the economy.
In the second essay, we examine the role of consumer confidence on economic activities like households’ consumption in good and bad economic times. We consider the “news” versus “animal spirit” approach interpretation of consumer confidence. In the wake of the Great Recession of 2008-09, many have called for confidence-boosting policies to help speed up the recovery. A recent study has reinforced these policy calls by showing that the Michigan Consumer Confidence Index contains important information about “news” on future productivity that has long-lasting effects on economic activities like aggregate consumption. Using US data, we show this conclusion is more nuanced when considering an economy that has different potential states. We investigate regime-switching models which use the National Bureau of Economic Research US business cycle expansion and contraction data to create an indicator series that distinguishes bad and good economic times and use this series to investigate impulse responses and variance decompositions. We show the connection between consumer confidence to some types of consumer purchases is important during good economic times but is relatively unimportant during bad economic times. We also use this type of model to investigate the connection between news and consumer confidence and this connection is also shown to be state dependent. In the context of the animal spirits versus news debate, our findings show that during economic expansions, consumer confidence shocks likely reflect news, while during economic contractions, consumer confidence shocks are consistent with animal spirits. These findings also have important implications for recent policy debates which consider whether confidence boosting policies, like raising inflation expectations on big-ticket items such as automobiles or business equipment, would lead to a faster recovery.
The third essay investigates expectation shocks and their effect on the economy. For instance, this essay investigates whether the economy responds to expectation shocks in an importantly asymmetric way. A growing literature shows that agents' expectation about the future can lead to boom-bust cycles. These studies so far ignore the transmission effects of expectations on current economic activities across the policy regimes. Using the Survey of Professional Forecasters and Livingstone Survey data, this study empirically investigates the effects of expectation shocks on macroeconomic activities when policy regimes shift. Identifying a structural shock to expectations by using the timing of information in the forecast surveys and actual data releases, we show that the effects of agents' expectations about the future on current macroeconomic activities are asymmetric across the policy regimes. In particular, we find that a perception of good times ahead typically leads to a significant rise in current measures of economic activity in a hawkish regime relative to a dovish regime. We also find that monetary policy's reactions to agents' expectations are asymmetric across the policy regimes. Our findings do not support the views of critics of the central banks, who argued that keeping monetary policy too easy for too long is responsible for fueling the booms. Instead, our findings support the traditional view that a positive (negative) expectation about the future coincides with an anticipatory tightening (easing) of monetary policy.
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