Date of Degree

9-2022

Document Type

Dissertation

Degree Name

Ph.D.

Program

Economics

Advisor

Sangeeta Pratap

Committee Members

Francesc Ortega

Merih Uctum

Thom Thurston

Subject Categories

Economics | Macroeconomics

Keywords

Monetary Policy, Markups, House Prices, VAR, Macroeconomics, New Keynesian

Abstract

Chapter 1: House Prices and Aggregate Markups: A VAR Approach

Based on the empirical results of Stroebel and Vavra (2019), who find that a local increase in house prices translates into higher local retail markups and prices, I investigate whether this relationship holds at the aggregate level. I first construct a quarterly aggregate markup series and find that house prices and aggregate markups have a positive relationship. This result emerges from a Vector Autoregression (VAR) system that includes the nominal interest rate, the inflation rate, aggregate house prices, aggregate markups, and real output. I use the Impulse Response Functions (IRFs) to understand the joint behavior of the variables in the system. This positive relationship between house prices and aggregate markups is robust to different specifications or sample periods, different methods of estimating the responses, such as local projections and generalized IRFs, and a Vector Error Correction Model (VECM) estimation.

Chapter 2: House Prices, Aggregate Markups, and Monetary Policy

I study the empirical relationship between house prices, aggregate markups, and inflation in a Vector Autoregressive (VAR) setting. I find that following a positive housing price shock, both markups and inflation increase, which is the aggregate counterpart of the findings of recent studies that find a positive relationship between house prices, retail prices, and markups at the local level. To rationalize these empirical results I develop a New Keynesian model with a housing sector in which the evolution of markups depends both on the evolution of house prices, which are endogenous, and an exogenous shock. The presence of endogenous markups changes the dynamics of the interest rate, inflation, markups, and output only after a housing price shock. The responses of these variables to other structural shocks are the same as those of a model with purely exogenous markups, which suggests that the optimal monetary policy response to house prices should not be too different from the response to other shocks. Consequently, the standard Taylor rule that reacts to the output gap and to inflation approximates the optimal policy even if the Central Bank believes markups are exogenous.

Chapter 3: Do Aggregate House Prices Influence Aggregate Markups in the Euro Zone?

Based on recent evidence about house prices positively affecting aggregate markups in the U.S., I investigate whether this is the case for other advanced economies. In particular, I focus on the twelve countries that initially joined the euro area. Using an EU-level VAR, a panel VAR and country-level VARs, I find that house prices do not affect aggregate markups for these countries. These results are independent of the weighing used to compute aggregate markups.

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