Essays on Empirical Macroeconomics

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Essays on Empirical Macroeconomics

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Title: Essays on Empirical Macroeconomics
Author: Stella, Andrea
Citation: Stella, Andrea. 2012. Essays on Empirical Macroeconomics. Doctoral dissertation, Harvard University.
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Abstract: This dissertation consists of three essays on empirical macroeconomics. The first essay estimates a dynamic multi-product model in order to assess the magnitude of menu costs. The leading theories on monetary policy non-neutrality require some degree of price rigidity, which is often introduced by assuming fixed costs of price adjustment, also known as menu costs. Empirical evidence on the existence of such menu costs is very scarce. Using weekly data on prices, costs and units sold by a supermarket chain, I estimate a discrete-choice dynamic model of a multi-product firm facing menu costs with a moment inequalities approach. This empirical methodology allows me to estimate two types of fixed costs of price adjustment: costs that are independent of the number of items that change prices and costs that are incurred at each item’s price change. I find that both types of menu costs exist and are substantial. The total costs from changing prices is estimated to be bounded between 0.13% and 0.76% of revenues and between 6.63% and 38.18% of net margins. The first type of fixed cost accounts for approximately half of this expense, pointing at substantial economies of scope in price setting. The second essay develops a parsimonious bivariate model of inflation and unemployment that allows for persistent variation in trend inflation and the NAIRU. The model, which consists of five unobserved components (including the trends) with stochastic volatility, implies a time-varying VAR for changes in the rates of inflation and unemployment. The implied backwards-looking Phillips curve has a time-varying slope that is steeper in the 1970s than in the 1990s. Pseudo out-of-sample forecasting experiments indicate improvements upon univariate benchmarks. Since 2008, the implied Phillips curve has become steeper and the NAIRU has increased. The third essay investigates empirically whether firm-level shocks have an impact on aggregate fluctuations. I estimate a dynamic factor model with firm-level data so as to be able to identify aggregate, sectoral and idiosyncratic shocks to firms. Two main features emerge from the analysis. First, firm dynamics are dominated by idiosyncratic shocks; for more than 70% of firms idiosyncratic shocks account for 60% or more of firm level fluctuations. The second and most interesting result is that firm-level shocks explain about 20% of the variance of aggregate GDP growth, which seems to point at a very important role played by idiosyncratic shocks in explaining aggregate fluctuations.
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