Scientific Monographs, Bank of Finland
No E:34/2006:
Essays on Empirical Macroeconomics
Aaron Mehrotra ()
Abstract: This thesis consists of four essays in empirical
macroeconomics. The first three essays examine the conduct of monetary
policy during a disinflationary and deflationary era, with the policy
interest rates close to or at the zero bound. The questions of interest
include the potency of the interest rate channel, the stability of broad
money demand, and the possibility to use the exchange rate channel in order
to affect economic activity and the price level. We use time series
econometrics techniques, mainly vector autoregressions, focusing on Japan.
While we find that basic relationships between the variables appear
unaltered by deflation, a further stimulative impact is difficult to
implement once the zero bound is hit. This can be due to political reasons,
as in the case of introducing a tax on currency in order to bring about
negative interest rates, or because the needed stimulus is very big, as in
the case of yen depreciation to increase the price level. The last essay
focuses on the fiscal policy aspects of the European Union’s most recent
enlargement. We examine whether the fiscal austerity required by the
Maastricht criteria and the Stability and Growth Pact would be harmful for
the socio-economic development of the new Member States. Introducing an
indicator for socio-economic development and utilizing instrumental
variables regressions, we find that fiscal retrenchment, including a lower
level of public debt, would be advantageous for development. A policy
implication is to maintain the Stability and Growth Pact or an equivalent
intergovernmental fiscal rule to curb public spending and debt.
Keywords: deflation; disinflation; zero lower bound; broadly defined liquidity; socio-economic development; Stability and Growth Pact; EU enlargement; (follow links to similar papers)
JEL-Codes: E31; E42; F41; H50; H60; I00; (follow links to similar papers)
248 pages, July 11, 2006
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