Essays in Monetary Economics

Abstract

This dissertation includes three essays on applied econometrics and monetary economics. Chapter 1 investigates the impact of supply and demand shocks in the global crude oil market on the CDX spread, in the context of a structural VAR model based on monthly data, over the period from November 2003 to October 2015. It finds that the reaction of the CDX spread to changes in the real price of crude oil differs considerably depending on the sources of shocks. In the long run, crude oil supply shocks, aggregate demand shocks, and oil-specific demand shocks together account for nearly 90% of the variation of the CDX spread. Chapter 2 uses the Markov switching approach to account for instabilities in the long-run money demand function and compute the welfare cost of inflation in the United States. In doing so, it circumvents the problem of data-mining of some earlier seminal contributions on these issues, allowing for complicated nonlinear dynamics and sudden changes in the parameters of the money demand function. Moreover, it extends the sample period, and investigates the robustness of results to alternative money demand specifications, monetary aggregation procedures, and assumptions regarding dynamics aspects of the money demand specification. Chapter 3 investigates the relationship between inflation and money growth in the United States using the Markov regime switching approach to account for instabilities. It employs the Divisia monetary aggregates and detects a structural change in the inflation-money growth relationship in 1984 for all monetary aggregates. In both high and low inflation regimes, the response of inflation to a money growth increase is either negative or trivial. Moreover, it finds that incorporating the growth rate of output and the change in the interest rate into the model does not fix the broken quantity-theoretic one-for-one relationship between inflation and money growth.