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Essays on estimating and calibrating the effects of macroeconomic policy over the business cycle

Huang, Jilei (2011) Essays on estimating and calibrating the effects of macroeconomic policy over the business cycle. PhD thesis, University of Glasgow.

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Abstract

This thesis consists of three chapters on post-reform Chinese business cycles and alternative methods for solving non-linear rational expectations models. Using quarterly data for the period 1980-2009, Chapter 1 examines the effects of aggregate demand and supply shocks on aggregate fluctuations in China. It further decomposes demand shocks into money supply, money demand and fiscal shocks as in the IS-LM-PC model by applying both long- and short-run restrictions in the context of the structural VAR proposed by Galí (1992). The results show that the estimated impulse responses, in terms of the supply and the three demand shocks, match well with the predictions of the theory. However, as the forecast error variance decompositions show, supply shocks are the main source of fluctuations, accounting for about 89% of output variations in the short-run. Given the nature of this transition economy, this may indicate that there are still institutional obstacles due to incomplete economic reform which prevents the market mechanism from working fully. Despite the overall dominance of supply shocks, the historical decomposition of the five cycles in output between 1983 and 2009 detects important roles played by various demand shocks in some sub-periods. The above results are robust to alternative choices of data for money and interest rate. In Chapter 2, an RBC model with utility generating government consumption and productive public capital is calibrated to annual Chinese data for the post-reform period 1978-2006. The main findings are: (i) the model generates a reasonable overall account of the business cycles in the Chinese economy; (ii) TFP shocks mainly contribute to the good fit of the model, whilst the two fiscal policy shocks help to further improve the model's performance; (iii) our results are robust to alternative calibrations such as high and low capital shares, weights of components in utility and constant return to scale aggregate production function in public capital; and (iv) the shock to the ratio of government consumption to output delivers a dominant negative wealth effect, whilst the shock to the ratio of government investment to output can generate significant positive wealth effects in both the short- and long-run. The third chapter solves the benchmark New Keynesian model using the log-linearization method, second order approximation and the parameterized expectations algorithm (PEA). The results show that the three solution methods display varying degrees of quantitative differences in simulated population moments, distributions, policy functions and impulse response functions. In particular, the generated price dispersions are significantly different across solution methods. The accuracy evaluations in terms of Judd's criteria and Marcet's statistical test show that the PEA performs better than the other two methods, particularly when solving the price-adjustment equation. This result is robust to a number of alternative calibrations.

Item Type: Thesis (PhD)
Qualification Level: Doctoral
Keywords: Structural VAR, IS-LM identification, Business Cycles, Reform and Transition; Real business cycle (RBC), TFP and fiscal policy; New Keynesian model, PEA solution, Accuracy
Subjects: H Social Sciences > H Social Sciences (General)
H Social Sciences > HB Economic Theory
Colleges/Schools: College of Social Sciences > Adam Smith Business School > Economics
Supervisor's Name: Malley, Professor Jim
Date of Award: 2011
Depositing User: Mr Jilei Huang
Unique ID: glathesis:2011-2495
Copyright: Copyright of this thesis is held by the author.
Date Deposited: 13 Apr 2011
Last Modified: 10 Dec 2012 13:56
URI: http://theses.gla.ac.uk/id/eprint/2495

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