Zhou, Cheng (2015-08). Essays on the State Dependent Effects of Monetary Policy and Fiscal Policy. Doctoral Dissertation. Thesis uri icon


  • This dissertation analyzes the effects of monetary policy and fiscal policy from a state-dependent perspective. The first chapter is on the dynamic effect of monetary policy on asset price. Employing a two-state threshold local projection method, we find that when the Fed increases the Federal Funds rate, the stock price decreases in normal times, but increases during bubbly episodes. We allow time-varying risk premium and show that this result is driven by both the asymmetric effects on fundamentals and the existence of bubbles. Moreover, the paper captures the effect of an exogenous tightening monetary shock on stock prices as an increasing function of the size of bubbles, using a flexible semiparametric varying-coefficient model specification. The state-dependent evidence is more informative in measuring monetary policy effects than linear or time-varying methods, and is also robust to different identification schemes and various definitions of bubbles. This paper points out two important transmission channels of monetary policy on asset price: risk premium and asset bubbles, which are often ignored in theoretical models. On the policy side, our empirical analysis suggests that central banks should be cautious about adopting "leaning against bubble" monetary policies when the bubble size is relatively large. Another contribution is that we propose a novel empirical framework to study generalized state-dependent impulse response functions, a methodology which should have many applications in macroeconomics. The second chapter uses more than one hundred years of US historical data to examine the fiscal multiplier and how it may differ during different economic conditions. Using the flexible semiparametric varying coefficient method in the framework of local projections, we directly model the fiscal multiplier as a function of various state variables. The paper shows that the U.S. fiscal multiplier is slightly below one and approximately the same, during periods of slack as compared to normal times. Our results suggest that fiscal policy was not necessarily a more powerful tool to stimulate aggregate demand during the "Great Recession".

publication date

  • August 2015