Essays on Macroeconomic Theory as a Guide to Economic Policy

This dissertation consists of four chapters and an appendix. After an introductory chapter with an extended literature overview, Chapter 2 is dedicated to the topic of macroeconomic policy in a heterogeneous monetary union. Chapter 3 investigates the macroeconomics of real estate, and Chapter 4 deals with a New Keynesian open economy model versus the six major puzzles in International Macroeconomics. An appendix provides some derivations and mathematical details. In the following, I briefly sketch the approach and main findings of Chapters 2 to 4. Chapter 2 uses a two-country model with a central bank maximizing unionwide welfare and two fiscal authorities minimizing comparable, but slightly different country-wide losses. The rivalry between the three authorities is analyzed in seven static games. Comparing a homogeneous with a heterogeneous monetary union, welfare losses relative to the social optimum are found to be significantly larger in a heterogeneous union. The best-performing scenarios are cooperation between all authorities and monetary leadership. Cooperation between the fiscal authorities is harmful to both the whole union’s and the country-specific welfare. The goal of Chapter 3 is to investigate whether or not it is possible to explain the house price to GDP ratio and the house price to stock price ratio as being generally constant, deviating from its respective mean only because of shocks to productivity? Building a two-sector RBC model for residential and non-residential capital with adjustment costs to capital in both sectors, it is shown that an anticipated future shock to productivity growth in the non-residential sector leads to a large increase in house prices in the present. This property of the model is used to explain the current house price behavior in the U. S., the U. K., Japan and Germany. In Chapter 4, the following question is posed: Can the New Keynesian Open Economy Model by Galí and Monacelli (2005b) explain “Six Major Puzzles in International Macroeconomics”, as documented in Obstfeld and Rogoff (2000b)? The model features a small open economy with complete markets, Calvo sticky prices and monopolistic competition. As extensions, I explore the effects of an estimated Taylor rule and additional trade costs. After translating the six puzzles into moment conditions for the model, I estimate the five most effective parameters using simulated method of moments (SMM) to fit the moment conditions implied by the data. Given the simplicity of the model, its fit is surprisingly good: among other things, the home bias puzzles can easily be replicated, the exchange rate volatility is formidably increased and the exchange rate correlation pattern is relatively close to realistic values. Trade costs are one important ingredient for this finding.