Lee, Dou Young (2017-07). Essays on Applied Macroeconomics. Doctoral Dissertation.
This thesis investigates the U.S. business cycle dynamics considering time-variations and breaks predominantly associated with the Great Recession in the late 2000s. In the first essay, I evaluate the predictive content of financial variables and unconventional monetary policy measures for the U.S. output growth and inflation before, during, and after the Great Recession from 1960-2015. I compare the local forecasting performances of the variables with attention to the Great Recession period when the Federal Reserve System and market participants were not able to use the federal funds rate for a policy instrument and a leading indicator for the economy. This shows that the predictive ability of the credit spread, stock price, and market expectation measures for output growth and inflation change significantly increased during the Great Recession. The result is consistent with the idea that the Great Recession was primarily driven by a financial shock, and that financial condition measures might be useful indicators for the future economy to investors and central bankers. Additionally, it is important that financial market conditions are not exacerbated by a future economic shock to avoid a vicious cycle. In the second essay, I examine how the conditional volatilities of the U.S. macroeconomic variables have changed before and during the Great Recession considering conditional mean changes. I implement multiple structural break tests in a reduced form model to find structural changes in the volatilities and means of the variables using the data from 1960-2015. The test results show that the increase in the volatility in the economy during the Great Recession was temporary, and there was no structural break in the growth rate of GDP during the Great Recession. But, there was a structural break in the growth rates of consumption variables, which are major parts of the economy, and demand-related variables, such as real disposable income and liabilities of consumers. A simulation result ii suggests that a structural break in the growth rate of the economy might have occurred before the Great Recession if the recent sluggish economy continues in the coming years. This evidence suggests that the monetary policy in the period of the Great Moderation might be reconsidered for the sustainable growth of the economy beyond the short-run, and policy for improving the recent sluggish economy, especially consumption, might be necessary to avoid a structural decline in the growth rate of the economy.