ABSTRACT LI, HUACHEN. Essays in Macroeconometrics. (Under the direction of James M. Nason). This dissertation consists of two essays in macroeconomics and macroeconometrics. The first paper studies macroeconomic labor market fluctuations and effects in a structural vector autoregres- sion (SVAR) with time-varying parameter (TVP) and stochastic volatility (SV). The second chapter extends the first chapter to study the macroeconomic effects of immigration. There is no consensus among macroeconomists about the response of hours worked to a TFP shock. The first chapter of this dissertation offers new evidence on the TFP - hours worked rela- tionship. I extend [Gal99]. The extension estimates Galí’s bi-variate regression of average labor productivity (ALP) and hours worked in a SVAR that includes TVP and SV to test the labor market predictions of the New-Keynesian (NK) models against Real Business Cycle (RBC) models. I update Galí’s SVAR by including time-varying parameter (TVP) and stochastic volatility (SV). The TVPs and SV are included in the SVAR to address structural change and large but short-run variation in the data. My estimates show that the TVPs and SV are important for resolving the lack of consensus surrounding Galí’s hypothesis, and present a new challenge that supports RBC and NK theories. The second essay explores the impact of immigration on the macroeconomy. Shocks to immigra- tion are identified within a SVAR with short- and long-run restrictions. The key short-run restriction is that immigration does not respond to other shocks at impact. The long-run restrictions are Galí’s long-run neutrality of labor productivity to labor market shocks, a permanent income shock, and long-run neutrality of immigration with respect to transitory shocks. I estimate TVP-SV-SVARs to account for structural change in the U.S. economy and changes in U.S. immigration policy over the sample. The estimates indicate that over the business cycle, productivity decreases with respect to an immigration shock. Over the same horizon, hours worked falls. © Copyright 2019 by Huachen Li All Rights Reserved Essays in Macroeconometrics by Huachen Li A dissertation submitted to the Graduate Faculty of North Carolina State University in partial fulfillment of the requirements for the Degree of Doctor of Philosophy Economics Raleigh, North Carolina 2019 APPROVED BY: Giuseppe Fiori Douglas Pearce Xiaoyong Zheng James M. Nason Chair of Advisory Committee DEDICATION This is for my grandparents, mom, dad, and Rachel. ii BIOGRAPHY Huachen Li was born and raised in Shenyang, China. After completing high school in Shenyang, he attended the College of Wooster as a member of Class of 2012 and received a bachelor’s degree in business economics. In 2013, he received his master’s degree in management from Wake Forest University and worked as a search engine marketing analyst. Huachen began his doctoral study in economics at North Carolina State University in 2014. His graduate research is in macroeconomics and macroeconometrics. During his time in Raleigh, he worked as an instructor in the Poole College of Management and as an adjunct professor at Meredith College. Huachen will join the Department of Economics at Kenyon College as an assistant professor starting fall 2019. iii ACKNOWLEDGEMENTS This dissertation and the completion of my degree would not have been possible without the effort, advice, and encouragement of my advisor, James M. Nason. He has been a wonderful mentor pro- viding the ideal balance between guidance and autonomy, which allowed me to grow substantially to become an economist. I am deeply grateful for his patience, enthusiasm, and flexibility, especially on the days that I needed it the most. I would like to thank my dissertation committee, Giuseppe Fiori, Douglas Pearce, and Xiaoyong Zheng for their contribution towards this dissertation and enhancement of my education. I am very lucky to have had committee members who are experts in economics and incredible proofreaders. I owe a tremendous amount of thanks to Lee Craig for his continuous help in preparing me to become a junior faculty. I would also like to thank Xiaoyong Zheng and Tamah Morant, without whom I would not have been where I am today. Additionally, I thank Robin Carpenter, Ayse Kabukcuoglu Dur, Ilze Kalnina, Ivan Kandilov, Soumendra Lahiri, Thayer Morrill, Denis Pelletier, Bobby Puryear, Allison Lowe Reed, Nora Traum, Sherley Teel, Walter Thurman, Mark Walker, Jingjing Yang, Anne York, Curtis Youngblood, and many others who helped to shape me into the economist I am today. The journey of my graduate studies was amazing, but also challenging. Thank you Andrew Hessler, Sasha Naumenko, Kelly Nelson, Kenny Rich, Bila Zhaladai, and many other friends and colleagues for making it more of the former. Special thanks to Carmichael Gymnasium for keeping me sane. Finally, I wish to express my gratitude to my family who has always given me unconditional love. Thank you, Rachel, for making all this work worthwhile. iv TABLE OF CONTENTS LIST OF TABLES ......................................................... viii LIST OF FIGURES ........................................................ ix Chapter 1 The Time-Varying Response of Hours Worked to a Productivity Shock ....... 1 1.1 Introduction ..................................................... 1 1.2 Data and Instabilities............................................... 5 1.2.1 Data...................................................... 5 1.2.2 Structural Breaks in a Reduced-form VAR........................... 5 1.3 A TVP-SV-SVAR and Bayesian Estimation ................................ 7 1.3.1 TVP-SV-SVAR............................................... 7 1.3.2 Priors..................................................... 9 1.3.3 Sampling Algorithm .......................................... 10 1.4 The Effect of TFP Shocks with Time Variation ............................. 11 1.4.1 IRFs of Hours Worked to a TFP Shock.............................. 11 1.4.2 IRFs of ALP to a Demand Shock.................................. 12 1.4.3 IRFs of Output to a TFP Shock................................... 13 1.4.4 Evidence from FEVDs......................................... 14 1.5 Source of Structural Change.......................................... 16 1.5.1 Estimates of Stochastic Volatility................................. 16 1.5.2 Estimates of Structural Intercepts and Slope Parameters................ 17 1.5.3 Discussion................................................. 17 1.6 Conclusion ...................................................... 18 Chapter 2 The Time-Varying and Volatile Macroeconomic Effects of Immigration ...... 32 2.1 Introduction ..................................................... 32 2.2 U.S. Immigration Policy and Data...................................... 34 2.2.1 Background on Recent Changes to Immigration Policy................. 35 2.2.2 Data...................................................... 35 2.3 TVP-SV-SVARs.................................................... 36 2.3.1 TVP-SV-SVAR Methodology..................................... 37 2.3.2 Identification............................................... 38 2.3.3 Bayesian Estimation.......................................... 43 2.4 Results ......................................................... 43 2.4.1 Bayesian Model Selection Results ................................ 44 2.4.2 Structural Dynamic Responses .................................. 45 2.4.3 FEVD of the Structural Shocks................................... 48 2.4.4 Evidence from Time-Varying Parameters and Stochastic Volatility......... 48 2.5 Conclusion ...................................................... 49 BIBLIOGRAPHY ......................................................... 63 APPENDICES ........................................................... 70 v Appendix A Appendix for Chapter 1 .................................... 71 A.1 Data Source and Construction .................................... 71 A.1.1 Hours Worked .......................................... 71 A.1.2 ALP Data .............................................. 72 A.2 A Fixed-Coefficient SVAR and Identification .......................... 73 A.2.1 A Fixed-Coefficient SVAR .................................. 73 A.2.2 Identification Assumptions................................. 75 A.3 Details about the Andrews Test.................................... 76 A.4 Details in Sampling Algorithms.................................... 77 A.4.1 Alternative Prior......................................... 77 A.4.2 Draw B~................................................ 77 A.4.3 Draw H ............................................... 78 A.4.4 Draw ............................................... 79 A.5 V Convergence Diagnosis ......................................... 80 A.6 Bayesian Model Selection........................................ 82 A.7 Additional IRFs ............................................... 83 Appendix B Appendix for Chapter 2 .................................... 85 B.1 Relevant Recent Changes in U.S. Immigration Policy.................... 85 B.2 Details in Data Construction ..................................... 87 B.2.1 Interpolation of Quarterly Immigration........................ 87 B.2.2 Results of Alternative Interpolation Methods.................... 89 B.2.3 Unit Root Test Results..................................... 90 B.2.4 Data Construction of Consumption........................... 90 B.3 Alternative Assumption in Stationarity of Hours Worked...............................................