| My first essay characterizes the behavior of US monetary policy over the business cycle, using a regime switching model with a time-varying transition matrix. The empirical findings are threefold. First, the federal funds rate displays shifts in regime, with a tendency to rise as long as the economy stays in expansion, and to start falling dramatically as soon as a recession begins. Second, the higher the federal funds rate or the inflation rate, the greater the probability that the economy will shift from expansion to recession. Third, the lower the inflation rate, the greater the probability that the economy will shift from recession to expansion. These findings are interpreted as the outcome of "stop-go" monetary policies.;My second essay studies the reserve market by interpreting vector autoregressons (VAR) using an optimizing equilibrium model. A theoretical model of a loan and a reserve market, where banks solve a dynamic maximization problem and the Federal Reserve Board controls the supply of reserves, is constructed and solved numerically. A trivariate VAR summarizes the dynamics of the federal funds rate, the one-month commercial paper rate, and real nonborrowed reserves from 1984:3 to 1996:1. In the spirit of Gallant and Tauchen (1996), the scores of the estimated VAR are used as orthogonality conditions for Generalized Methods of Moments to calibrate the model. It is shown that the reserve supply shock dominates the reserve demand shock in the residual of the federal funds rate equation in the VAR since 1984. I conclude that the residual offers a reasonable proxy for an exogenous shock to monetary policy. |
