Essays on Macroeconomic Dynamics

In the first essay, I introduce deep habit formation into a two-country sticky price model with local currency pricing and examine the resulting model’s ability to account for the dynamics of the real exchange rate present in the data. The model is able to explain the persistence of the real exchange rate, but over predicts the volatility . In my second essay, I challenge the widely held view that quantitative easing (QE) has managed to reduce long-term interest rates. I support my argument in two ways. First, I provide evidence which undermines the importance of the portfolio-balance channel, the main theory typically cited to explain the effectiveness of QE. Second, I show that investors have increased their valuation of treasury bonds (across all maturities), thus increasing demand for treasury debt and driving down yields. I build a general equilibrium model with a zero lower bound constraint on short-term interest rates to highlight the mechanism underlying this channel. To the extent that this channel is independent of QE, it adds newfound uncertainty on the effectiveness of this policy to stimulate the economy. For my third essay, using data from treasury auctions, I want to understand to what extent the increase in demand for treasury bonds after the financial crisis of 2008-09 is driven by the non-pecuniary benefits of treasuries.

Many thanks to Petar’s Defense Committee: Committee Members: Marco Airaudo, PhD (Chair) Andre Kurmann, PhD Maria Olivero, PhD Christopher Laincz, PhD Ricardo Serrano-Padial, PhD Tristan Potter, PhD