Essays in Macroeconomics

This dissertation consists of three essays which investigate the economic implications of monetary and fiscal policies on the macroeconomy. The first essay focuses on the following question: how can we explain the observed behavior of aggregate inflation in response to e.g. monetary policy changes? Mankiw and Reis (2002) have proposed sticky information as an alternative to Calvo sticky prices in order to model three conventional views about the behavior of aggregate inflation. We use a fully-fledged DSGE model with sticky information and compare it to Calvo sticky prices, allowing also for dynamic inflation indexation as in Christiano, Eichenbaum, and Evans (2005). We find that sticky information and sticky prices with dynamic inflation indexation do equally well in our DSGE model in delivering the conventional view. The second essay analyzes the following question: how does the behavior of households and firms in the US compared to the EU-15 adjust if fiscal policy changes taxes? The Laffer curve provides us with a framework to analyze this question. Using a calibrated neoclassical growth model we show that the US and the EU-15 area are located on the left side of their labor and capital tax Laffer curves, but the EU-15 economy being much closer to the slippery slopes than the US. A dynamic scoring analysis shows that more than one half of a labor tax cut and more than four fifth of a capital tax cut are self-financing in the EU-15 economy. Therefore, we conclude that there are higher incentive effects in the EU-15 compared to the US in response to tax cuts. Finally, the third essay focuses on the following question: should fiscal policy pre-announce tax reforms before their implementation from a welfare point of view? Domeij and Klein (2005) have shown that pre-announcement of an optimal tax reform is costly in terms of welfare. We reexamine their claim by taking two additional features of government spending into account: public goods and public capital. We show that valuable and productive government spending is likely to reduce the welfare costs of preannouncement. As a further contribution, we show that short-run confiscation and/or subsidy of capital and labor income is not important for the welfare gains of pre-announced reforms with sufficiently long pre-announcement duration. For 4 years pre-announcement, a suboptimal reform without confiscation and subsidy generates similar welfare gains as the baseline optimal reform. The underlying tax structure of both reforms, however, appears to be very different.