Essays in Empirical Macroeconomics

Abstract

This thesis is a collection of three self contained chapters in the area of empirical macroeconomics. Chapter 2 examines the behaviour of the volatility of the structural shocks and the macroeconomic variables in the post-reform period in India in a time-varying framework. A time varying parameters structural vector autoregression with stochastic volatility model is used to investigate the evolving dynamics of the macroeconomy of India in the post-reform period. We detect a sharp reduction in estimated stochastic volatility during the post-reform years for all shocks and variables. In terms of the stochastic volatility, we find that the period 2001 to 2006 seems to have the lowest volatility in the whole sample and can be dubbed as the short ‘Great Moderation’ period of India. We find that the estimated stochastic volatility of supply shocks is more than the demand shocks. We also note that demand shocks rather seem to be persistent than supply shocks during the period from 2007-14. Chapter 3 explores the role of nominal GDP as an implicitly preferred monetary policy target in the US during the Great Moderation period. Monetary policy via stabilization of inflation expectations by targeting inflation, has been argued as one of the prominent factors contributing for the Great Moderation in the U.S. Studies using Taylor rule type monetary policy reaction functions have found inflation to be the major target variable of the Federal Reserve. This study counters this view, and shows that for accomplishing its objective of stabilizing inflation expectations, the Federal Reserve was instead implicitly targeting nominal GDP. This claim is corroborated by estimating different variants of nominal GDP rules, which then is compared with Taylor rules using both ex-post revised data and real time briefing forecasts of FOMC. The results counter the conventional view, and observe that post Volcker era or during the period of Great Moderation (1984-2007), the Federal Reserve had a stronger implicit preference for nominal GDP as compared to inflation Chapter 4 examines whether nominal GDP can pass the forecasting test to be a monetary policy framework. Forecast targeting became an important component of central banks from 1990’s onwards as a systematic approach to monetary policy deliberations and as a good communication medium with the public. Any robust monetary policy regime has to have good forecasting performance of its nominal anchor. Nominal GDP targeting has been suggested as a suitable alternative to the present inflation ‘targeting’ monetary policy framework. But as a good framework its nominal anchor should have good forecasting ability. This chapter tries to compare the forecast performance between the nominal anchors of inflation and nominal GDP targeting regimes for U.S. This task is undertaken by using a series of models from simple autoregressive models to state space models. U.S Inflation is hard to forecast, but it seems that NGDP is much more harder to forecast.