Labor Market Frictions, Interest Rates, and Macroeconomic Policies

My dissertation studies the effect of macroeconomic policies both theoretically and empirically.;In Chapter 1, I empirically estimate a DSGE model with search and matching frictions, endogenous job separation, and real wage rigidities to examine the main driving forces behind unemployment fluctuations. I find that shocks to unemployment benefits have historically been important for unemployment fluctuations, and the extension of unemployment benefits during the recent recession contributed to the higher unemployment rate.;In Chapter 2, I study the impact of liquidity shocks on the economy, the effectiveness of alternative government policies, and the role played by the zero lower bound on the nominal interest rate. I find that extended unemployment benefits could slightly alleviate the big decline in output caused by the liquidity shock through mitigating current consumption decline, but raise unemployment and slow the recovery of the labor market. Unconventional monetary policy and fiscal expansion are very effective in stimulating the economy. The importance length of staying at the zero lower bound depend on type of labor market rigidities.;In Chapter 3, I verify policy implications of New Keynesian models at the zero lower bound empirically. Through analyzing the responses of various yields to macroeconomic announcements, I find that the predictions of New Keynesian models for the behavior of interest rates when the zero lower bound is binding are reliable: nominal rates are less sensitive to news, and real rates respond to shocks in opposite directions from their behavior away from the zero lower bound. This suggests that at least in the short run, fiscal policy is more effective at the zero lower bound. I also find using an identification strategy based on heterogeneity that at the zero lower bound, monetary policy shocks account for less variation of both nominal and real rates, monetary policy is less effective in affecting short- and medium-term real rates, and the effect dies off faster.