UC Riverside

Our focus lies on the implications of recent monetary policy rules that operate under the zero lower bound. Time varying parameters show how changes in these parameters affect the impact of macroeconomic shocks. In addition to our analysis on the uncertainty that surrounds the economy within a zero lower bound regime. Our dissertation focuses on output uncertainty in an open economy; this is measured by the realized volatility.

Chapter 1 proposes a New Keynesian Markov Switching model where the coefficient of risk aversion switches between high and low risk regimes. Risk aversion is of primary interest because when the nominal interest rate hits the zero lower bound (ZLB) in New Keynesian models, the coefficient of risk aversion becomes the sole determinant in the relationship between output and inflation expectations. Results yield that risk-aversion plays a crucial role in the impact of macroeconomic shocks. This is especially true when the economy is constrained by the ZLB. We find substantial asymmetric impact of positive versus negative macroeconomic shocks at the ZLB. Given that the Federal Reserve cannot lower the nominal interest rate below zero as a response to negative inflation and aggregate demand shocks. However, it is granted more flexibility to respond to positive shocks.

In Chapter 2, we examine the impact of the zero lower bound (ZLB) on the uncertainty of personal consumption and money stock. We calculate the second conditional moments as a proxy for uncertainty. This chapter implements a multivariate GARCH model on U.S. personal consumption and real money balance from January 1980 to December 2014.Our main findings suggest that when constrained by the zero lower bound, consumption uncertainty declines. And, we note that real money uncertainty increases significantly.

While the core of our dissertation thus far has focused on the implications of recent monetary policy rules that operate under the zero lower bound. Chapter 3 highlights our investigation into the impact of trade openness on output volatility and how this impact may be affected by the country's level of development. We use a panel data set for 33 countries for the years of 1980 through 2009. A standard deviation of quarterly real GDP over a 5-year span is used as the dependent variable. Controlling for the country and period-specific effects, the main results are as follows: trade openness increases the output volatility. And, the output volatility of countries with a higher level of development is less affected by trade openness.