UC San Diego UC San Diego Electronic Theses and Dissertations Title Essays on Monetary Economics Permalink https://escholarship.org/uc/item/38m8q6qh Author Wu, Wenbin Publication Date 2017 Peer reviewed|Thesis/dissertation eScholarship.org Powered by the California Digital Library University of California UNIVERSITY OF CALIFORNIA, SAN DIEGO Essays on Monetary Economics A dissertation submitted in partial satisfaction of the requirements for the degree of Doctor of Philosophy in Economics by Wenbin Wu Committee in charge: Professor James Hamilton, Chair Professor Thomas Baranga Professor David Lagakos Professor Rossen Valkanov Professor Johannes Wieland 2017 Copyright Wenbin Wu, 2017 All rights reserved. The Dissertation of Wenbin Wu is approved and is acceptable in quality and form for publication on microfilm and electronically: Chair University of California, San Diego 2017 iii TABLE OF CONTENTS Signature Page . iii Table of Contents . iv List of Figures . vi List of Tables . vii Acknowledgements . viii Vita................................................................. ix Abstract of the Dissertation . x Chapter 1 Sales, Monetary Policy, and Durable Goods . 1 1.1 Data......................................................... 6 1.1.1 Descriptive Statistics . 7 1.2 Sales and Inflation . 8 1.2.1 Do Sales Respond to Aggregate Shocks? . 10 1.2.2 Aggregate Inflation and Sales . 13 1.3 A Two-sector Menu-cost Model . 16 1.3.1 Model Setup . 17 1.3.2 Computation Method . 22 1.3.3 Model Calibration . 24 1.4 Results . 26 1.5 Conclusions . 30 1.6 Acknowledgements . 30 Chapter 2 The Credit Channel at the Zero Lower Bound Through the Lens of Equity Prices . 31 2.1 Data and Reexamination . 34 2.1.1 Data . 34 2.1.2 Reexamining the Reaction of the Stock Market to Unconventional Monetary Policies. 36 2.2 Evidence on the Credit Channel . 39 2.2.1 Event Study . 39 2.2.2 OLS Estimation . 43 2.2.3 Heteroskedasticity-based Estimation . 47 2.3 Conclusions . 49 2.4 Acknowledgements . 50 iv Chapter 3 Are Financial Markets Less Responsive to Monetary Policy Shocks at the Zero Lower Bound? . 51 3.1 Data and Methodology . 53 3.2 Estimation Results . 55 3.3 Conclusions . 60 3.4 Acknowledgements . 60 Appendix A Chapter 1 . 61 A.1 A Simple Example of Sales . 61 A.2 Additional Figures and Tables . 62 A.3 KM’s Algorithm to Construct Temporary Price Changes . 63 Appendix B Chapter 2 . 64 B.1 FOMC dates . 64 B.2 Did The Stock Market React to Unconventional Monetary Policy? . 65 B.2.1 Simple event study . 65 B.2.2 Heteroskedasticity-based estimation . 65 B.3 Disaggregate Effect of Unconventional Monetary Policy . 68 B.4 Evidence on the Credit Channel . 69 B.5 Implementation methods - IV approach . 72 B.6 Distribution of the responses (Het) . 76 Bibliography . 77 v LIST OF FIGURES Figure 1.1. Price Indices After sales . 11 Figure 1.2. Decomposition of the inflation of the nondurable sector . 14 Figure 1.3. Decomposition of the inflation of the durable sector . 15 Figure 1.4. Price Series Generated by the Model . 17 Figure 2.1. Distribution of the responses based on the event study . 44 Figure 3.1. Time-varying Sensitvity Coefficients d d ...................... 58 Figure 3.2. Time-varying Sensitvity Coefficients d d ...................... 59 Figure A.1. The Price of WHOLE SPONGE CAKE NOT FROZEN . 61 Figure A.2. The Calculated Inflation and the Published Inflation . 62 Figure B.1. Distribution of the responses from heteroskedasticity-based estima- tion .................................................... 76 vi LIST OF TABLES Table 1.1. Moments of Data . 8 Table 1.2. Regression of the aggregate price index on sale price index . 12 Table 1.3. Assigned Parameters . 24 Table 1.4. Calibrated Parameters . 26 Table 1.5. Data and Simulated Moments . 27 Table 1.6. Simulated Aggregate Results . 29 Table 2.1. OLS Results Based on Event Study . 38 Table 2.2. Cumulative returns of portfolios sorted by financial constraints . 41 Table 2.3. Event Study Estimation and Responses to Monetary Policy . 46 Table 2.4. Heteroskedasticity-based Estimation and Responses to Monetary Policy . 48 Table 3.1. Coefficient Estimates b From The Linear Regression (1) Over 1990- 2000 .................................................... 56 Table 3.2. Constant Coefficient b Estimates From The Time-Varying Regres- sion (2) . 57 Table B.1. FOMC dates . 64 Table B.2. Stock Returns around The Baseline and The Full Event Set An- nouncements . 66 Table B.3. Unconventional Monetary Policy Announcement Dates . 69 Table B.4. Estimation Results from Heteroskedasticity Estimation . 70 vii ACKNOWLEDGEMENTS I would like to acknowledge Professor James Hamilton for his constant support as the chair of my committee. His guidance has proved to be invaluable. I would also like to acknowledge Professor David Lagakos, Johannes Wieland, Thomas Baranga, Rossen Valkanov, Valerie Ramey, Tommaso Porzio, Nels Lind and many other people who have provided comments and advice to my research. Chapter 1, “Sales, Monetary Policy, and Durable Goods”, in part, is currently being prepared for publication of the material. Wenbin Wu. The dissertation author was the sole author of this paper. Chapter 2, “The Credit Channel at the Zero Lower Bound Through the Lens of Equity Prices”, in part, has been submitted for publication of the material as it may appear in Journal of Money, Credit and Banking, 2017, Wenbin Wu. The dissertation author was the sole author of this paper. Chapter 3, “Are Financial Markets Less Responsive to Monetary Policy Shocks at the Zero Lower Bound?”, in full, is a reprint of the material as it appears in Economics Letters 2016, 145: 258-261. Wenbin Wu. The dissertation author was the sole author of this paper. viii VITA 2009 Bachelor of Arts, Beijing Normal University, Beijing 2012 Master of Arts, Renmin University of China, Beijing 2012–2017 Teaching Assistant, Department of Economics University of California, San Diego 2017 Doctor of Philosophy, University of California, San Diego PUBLICATIONS Wu, Wenbin. “Are Financial Markets Less Responsive to Monetary Policy Shocks at the Zero Lower Bound?” Economics Letters, 2016, 145: 258-261. FIELDS OF STUDY Major Field: Macroeconomics ix ABSTRACT OF THE DISSERTATION Essays on Monetary Economics by Wenbin Wu Doctor of Philosophy in Economics University of California, San Diego, 2017 Professor James Hamilton, Chair Chapter 1 contributes to the recent debate about the importance of temporary price changes for monetary policy transmission. Although sales occur very frequently, macroeconomists often filter them out because sales are not responsive to economic shocks. Using micro data underlying CPI, I demonstrate that after sales, the price index of durables goes down gradually, and that the aggregation of sales of durable goods have a significant impact on the aggregate inflation. However, sales of nondurables – the focus of previous studies – do not show these results. To study the impact of sales, I then propose a two-sector menu-cost model with the feature of sales. The model is able to x match the pattern of sales and moments in the micro data. By contrast, failing to account for temporary sales in a menu-cost model would increase the output effect by 73%, and the Calvo model calibrated to the frequency of regular price changes triples the output effect. Chapter 2 examines the impact of unconventional monetary policies on the stock market when the short-term nominal interest rate is stuck at the zero lower bound. Unconventional monetary policies appear to have significant effects on stock prices and the effects differ across stocks. In agreement with existing credit channel theories, I find that firms subject to financial constraints react more strongly to unconventional monetary policy shocks (especially large-scale asset purchases) than do less constrained firms. My results imply that the credit channel is as important as the interest rate channel in the transmission of unconventional monetary policies at the zero lower bound. Chapter 3 investigates the time-varying effects of monetary policy shocks on financial markets. I show that the corporate.