Essays on applied macroeconomics and monetary policy

The dissertation presents three essays in applied macroeconomics and monetary theory. First essay explores the existence of global financial cycles and examines the relationship between financial and macroeconomic sectors at a global scale. I find that there exist significant cycles in financial variables and the contribution of the financial shocks on global macroeconomic sector is significant and varying over time. Second essay examines the role of decentralization on regional convergence using night-time satellite lights data as proxy for regional economic activities. I find that the decentralization hinders regional convergence in the sample of developing countries. Third essay analyzes active and passive fiscal and monetary policy regime in the presence of long and short-maturity government debt. I utilize the advances made in money search model to analyze the policy regimes. I find that while there are some similarities between the regime, there are also significant differences. I also find that the results using money-search model can be different than using a reduced form models.

Innovation And Breaking The Circular Flow

Chapter 9 has a basic theme that even the simplest venture into innovation takes us into the realms of disequilibrium where the study of behaviour in transient states of any length is unavoidable, even if one sticks to the mantra of the rational economic agent. The very nature of the complexity involved in the study of innovation provides the curse of high dimensions. It is our belief that the utilization of low dimensional models in order to be able to obtain some analytical results, while of great value for exploration of basic problems, must be viewed in application as dealing with parable and metaphor intermixed with applied macroeconomics. Even with the gross behavioral simplifications of rational expectations these models can provide answers or at least raise precise questions in economic theory that remove the mystery from items such as “Bills only” by requiring specification of details such as grid size.

Short run stabilization and long run competitiveness: the Latvian case

Subject area Macroeconomics: fixed exchange rate regime, external and internal devaluation, international competitiveness, comparison to ongoing eurozone periphery problems. Study level/applicability The main audience for this case is undergraduate students in economics and business or graduate students in business or political science related studies. More particularly, the case suits a class on applied macroeconomics or general economic policy. Case overview The case investigates economic development in Latvia since it gained independence, the key focus is overheating in 2004-2007 and consequential extraordinary economic crisis of 2008-2009. This case gives a great starting point to discuss ongoing problems in peripheral eurozone (PIGS) in terms of internal versus external devaluation. Expected learning outcomes Students are expected to learn the differences between external and internal devaluation as well as a country's international competitiveness factors. Also, class discussion of similarities and differences between Latvia and PIGS should make students more aware of two types of devaluation. Supplementary learning materials Teaching notes are available. Please consult your librarian for access.

Spurious Regression

The spurious regression phenomenon in least squares occurs for a wide range of data generating processes, such as driftless unit roots, unit roots with drift, long memory, trend and broken-trend stationarity. Indeed, spurious regressions have played a fundamental role in the building of modern time series econometrics and have revolutionized many of the procedures used in applied macroeconomics. Spin-offs from this research range from unit-root tests to cointegration and error-correction models. This paper provides an overview of results about spurious regression, pulled from disperse sources, and explains their implications.