Essays on Business Cycles and Stabilization Policy by Christoph E. Boehm A dissertation submitted in partial fulfillment of the requirements for the degree of Doctor of Philosophy (Economics) in The University of Michigan 2016 Doctoral Committee: Associate Professor Christopher L. House, Chair Assistant Professor Joshua K. Hausman Professor Edward L. Ionides Professor Stefan Nagel Professor Matthew D. Shapiro c Christoph E. Boehm 2016 All Rights Reserved To my parents and to Nitya. ii ACKNOWLEDGEMENTS I am extremely grateful to my advisers, Chris House, Matthew Shapiro, Stefan Nagel, Josh Hausman, and Edward Ionides. This dissertation would not have been possible without their profound expertise, as well as their time spent with me sharing their insights. I am particularly indebted to Chris for supporting me from very early on in the doctoral program, for helping me to complete my first paper under his guidance and co-authorship, and for his confidence in my abilities. I am also grateful to Nitya Pandalai-Nayar and Aaron Flaaen with whom I had the pleasure of writing one of the chapters in this dissertation. I have benefited from their insights in many discussions. Beyond sharing her economic expertise with me, I would like to thank Nitya for her inexhaustible patience and support. The papers in this dissertation have benefited from conversations with many experts and friends. First and foremost, I would like to thank Andrei Levchenko who really assumed the role of a committee member throughout my years at Michigan. I am also grateful to Dan Ackerberg, Rudi Bachmann, Robert Barsky, Olivier Coibion, Javier Cravino, Yuriy Gorodnichenko, Kyle Handley, Valerie Ramey, Glenn Rudebusch, Isaac Sorkin, Sebastian Sotelo, Linda Tesar, and many others for their comments and suggestions. Finally, I would like to thank my family and friends for supporting and encouraging me at all times. The years at the University of Michigan would not have been the same without them. In particular, my parents provided me with unwavering support and a home which rejuvenated me every year. Visits with Rob in East Lansing and Ann Arbor made my time iii outside work much more pleasurable. iv TABLE OF CONTENTS DEDICATION :::::::::::::::::::::::::::::::::::::: ii ACKNOWLEDGEMENTS :::::::::::::::::::::::::::::: iii LIST OF FIGURES ::::::::::::::::::::::::::::::::::: viii LIST OF TABLES :::::::::::::::::::::::::::::::::::: x LIST OF APPENDICES :::::::::::::::::::::::::::::::: xii ABSTRACT ::::::::::::::::::::::::::::::::::::::: xiii CHAPTER I. Government Spending and Durable Goods ...............1 1.1 Introduction . .1 1.2 Theoretical analysis . .5 1.2.1 Model description . .5 1.2.2 The demand for durable and nondurable goods . 10 1.2.3 Implications for fiscal policy . 13 1.2.4 Numerical results . 18 1.3 Empirical evidence . 22 1.3.1 Evidence based on aggregate data . 22 1.3.2 Evidence based on industry-level data . 24 1.4 The zero lower bound . 35 1.5 Conclusion . 37 II. Optimal Taylor Rules in New Keynesian Models ........... 49 2.1 Introduction . 49 2.2 Baseline Model And Policy Objective . 52 v 2.3 Equilibrium in the Baseline Model . 55 2.4 Optimal Taylor Rules in the Baseline Model . 57 2.4.1 Monetary Policy in the Presence of Measurement Error . 60 2.4.2 Quantitative Analysis . 64 2.5 Signal Extraction and Optimal Taylor Rules . 67 2.5.1 Optimal Policy . 68 2.5.2 Does the Federal Reserve Follow an Optimal Taylor Rule? . 70 2.5.3 Signal Extraction and Interest Rate Smoothing . 71 2.6 Numerical Evaluation . 73 2.7 Conclusion . 75 III. Input Linkages and the Transmission of Shocks: Firm-Level Evi- dence from the 2011 T¯ohokuEarthquake ................ 84 3.1 Introduction . 84 3.2 Empirical Strategy and Specification . 89 3.2.1 Background . 90 3.2.2 Data . 92 3.2.3 Basic Theory . 94 3.3 Reduced Form Evidence . 97 3.3.1 Framework . 97 3.3.2 Results: Total Manufacturing Sector . 100 3.4 Structural Estimation of Cross Country Input Linkages . 102 3.4.1 Framework . 103 3.4.2 Estimation . 105 3.4.3 Connecting Model and Data . 108 3.4.4 Summary of Results . 110 3.5 Discussion . 111 3.5.1 Aggregation . 111 3.5.2 Implications . 112 3.5.3 Robustness and Extensions . 115 3.5.4 External Validity . 122 3.6 Conclusions . 124 APPENDICES :::::::::::::::::::::::::::::::::::::: 139 A.1 Model appendix . 140 A.1.1 Summary of equations . 140 A.1.2 Proofs of approximation results . 142 A.1.3 Robustness of fiscal multipliers to alternative calibrations . 145 A.1.4 Additional impulse response functions . 149 A.2 Appendix for aggregate empirical analysis . 149 A.2.1 Data used in aggregate analysis . 149 vi A.2.2 Additional evidence from national accounts data . 150 A.3 Appendix for industry-level empirical analysis . 152 A.3.1 Industry-level data . 152 A.3.2 Sample description . 155 A.3.3 Additional results . 160 A.3.4 Robustness . 161 A.3.5 Impulse response functions of prices . 164 A.3.6 State dependence . 166 B.1 Appendix: Proofs of the Propositions . 167 C.1 Chapter 2: Basic Theory Appendix . 182 C.1.1 Proof of Result 1 . 182 C.1.2 On Flexibility in Domestic Inputs . 184 C.2 Chapter 3: Data Appendix . 186 C.2.1 Matching Corporate Directories to the Business Register . 186 C.2.2 Classifying Firm-Level Trade . 191 C.2.3 Sample Selection . 195 C.3 Appendix: Other Results . 200 C.3.1 Alternate Specifications for Treatment Effects Regressions . 200 C.3.2 Probit Model of Import/Output Disruptions . 200 C.3.3 Bootstrapping Standard Errors . 202 C.3.4 Effects on U.S. Exports to Japan . 202 C.3.5 Effects on Employment and Payroll . 203 C.3.6 Effects on Unit Values (Prices) of Trade . 204 C.3.7 Ward's Automotive Data . 205 BIBLIOGRAPHY :::::::::::::::::::::::::::::::::::: 216 vii LIST OF FIGURES Figure 1.1 Crowding out of private sector spending. 44 1.2 Impulse response functions for a government spending shock . 45 1.3 Impulse response functions for durable and nondurable goods . 46 1.4 Impulse response functions for durable goods in recessions and expansions . 47 1.5 Model impulse response functions . 48 2.1 Parametric Variations in Shock Persistence . 77 2.2 Parametric Variations in Shock Variance . 78 2.3 Parametric Variations in Inflation Weight and Rate of Price Adjustment . 79 2.4 Level curves of the central bank's loss function . 80 2.5 Inflation and output gap estimates of the Fed . 81 2.6 Impulse Response Functions . 82 2.7 Impulse Response Functions . 83 3.1 Index of Japanese Industrial Production: Manufacturing Jul.2010 - Jan.2012 130 3.2 U.S. Imports from Japan and Rest of World, Jul.2010 - Jan.2012 . 131 3.3 U.S. Industrial Production: Manufacturing and Durable Goods . 132 3.4 Geographic Distribution of Earthquake Intensity and Affiliate Locations . 133 3.5 Density of Firm-Level Exposure to Japanese Imported Inputs: By Firm Type134 3.6 Dynamic Treatment Effects: Japanese Firms . 135 3.7 Relative Imported Inputs and Output (Proxy) of Japanese Firms: Fraction of Pre-Shock Level . 136 3.8 Assessing the Output Proxy Using Monthly Automotive Production . 137 3.9 Japanese Products: Average Distance from Benchmark Cost Shares: JPN Multinationals . 138 A.1 Impulse response functions for a government spending shock . 149 A.2 Spending response for durable and nondurable goods . 160 A.3 Impulse response functions of prices . 165 C.1 Relative Inputs and Output (Proxy) of Japanese Firms (Reduced Sample) Logged, HP-Filtered . 207 C.2 Dynamic Treatment Effects: Relative Japanese Exports of Japanese Firms 208 C.3 Density Estimates of Elasticities Across Bootstrap Samples . 210 viii C.3 Density Estimates of Elasticities Across Bootstrap Samples . 211 C.4 Automotive Production, Inventory, Sales by Firm Type, Distributed Lag Model ...................................... 214 ix LIST OF TABLES Table 1.1 Baseline calibration . 39 1.2 Estimates of durable and nondurable goods multipliers . 40 1.3 First stages . 41 1.4 Industry-level fiscal multipliers . 42 1.5 Industry-level multipliers for durable goods in recessions and expansions . 43 2.1 Baseline Calibration . 76 2.2 Evaluation of Policy Rules . 76 3.1 Summary Statistics: Imported Inputs and Inventories by Firm Type . 126 3.2 Summary Statistics . 127 3.3 Firm-Level Estimation: Results and Sample Details . 128 3.4 Firm-Level Estimation: Other Results . 129 A.1 Multipliers for alternative calibrations . 148 A.2 Estimates from disaggregated national accounts data . 151 A.3 Selected examples of PSC and FSC codes . 153 A.4 Spending shares for FSC code 1010 (Guns, over 30mm up to 75mm) . 154 A.5 Spending shares for FSC code 1560 (Airframe Structural Components) . 154 A.6 Industries and basic summary statistics . 155 A.7 Sectoral multipliers when controlling for Ramey's news variable . 161 A.8 Sectoral multipliers when allowing for industry-specific effects of monetary policy 162 A.9 Sectoral multipliers for a smoothing parameter of 400 . 162 A.10 Sectoral multipliers for a smoothing parameter of 6000 . 163 A.11 Sectoral multipliers estimated from 3-digit SIC industries . 163 A.12 First stages of the state-dependent specification . 166 C.1 DCA Match Statistics: 2007-2011 . 198 C.2 Uniworld Match Statistics: 2006-2011 . 199 C.3 Appendix Table Comparing the Results from Threshold Values W . 199 C.4 Predicting Japanese Import and U.S. Output Disruption by Firm Charac- teristics . 209 C.5 Dynamic Treatment Effects: Quarterly Employment/Payroll Surrounding T¯ohokuEvent . ..