Essays on Macroeconomics and Finance
Authors:   , Schnellbacher Sven 
Published: August 2024

Chapter 1 sheds light on cross-country asymmetries in the transmission of monetary policy shocks in the context of a currency union. It builds on previous research by Georgiadis (2014) and Georgiadis (2015) which shows significant asymmetries in the transmission of monetary policy shocks across a panel of Eurozone economies due to country-specific structural characteristics regarding the manufacturing sector and the financial system. The chapter empirically examines the importance of household indebtedness, bank risk-taking and financial globalization for the transmission of monetary policy shocks to output and housing prices. It relies on panel data for twelve Eurozone economies ranging from 1999Q2 to 2018Q4. The econometric analysis shows that the intensity of the decrease in real housing prices after a contractionary monetary policy shock increases with the leverage levels of the banking and household sectors. Moreover, a higher level of financial openness induces a stronger contraction in real GDP growth and a larger fall in real housing prices after a contractionary monetary policy shock. A deeper empirical analysis reveals that the level of financial openness explains an average of 66% of the decline in real GDP growth and 51% of the fall in real housing prices. The level of bank leverage is responsible for 60% of the decline in real GDP growth and 55% of the fall in real housing prices. Furthermore, an average of 33% of the decrease in the growth rate of real GDP and 44% of the fall in real housing prices is attributable to the level of household leverage. These results show that financial globalization is a major determinant of the transmission of monetary policy shocks to the real economy. By contrast, the leverage level of the banking sector is an important factor in shaping the transmission of monetary policy shocks to the financial side of the economy. Chapter 2 examines the linkages between income distribution and government debt. It draws on previous research by Pasinetti (1989) and You and Dutt (1996) which shows that economic growth and the interest rate are major determinants of this relationship. It also addresses the implications of variations in government spending, investment, tax rates and the real interest rate for the link between government debt and income distribution. The chapter extends the theoretical model of You and Dutt (ibid.) by assuming that not only capitalists but also workers save a fraction of their disposable income and hold government bonds. Additionally, compared to the previous literature, which focused the analysis on the functional distribution of income, the model in chapter 2 also includes the personal distribution of income. In addition, the model in chapter 2 takes the interest-growth differential into account. A comparative static analysis reveals that an increase in government spending increases the equilibrium rate of capacity utilization and the equilibrium rate of capital accumulation and raises the equilibrium public debt-to-capital ratio. An increase in investment also has expansionary effects but reduces the public debt-to-capital ratio in equilibrium. The consequences for income distribution are twofold. First, an increase in government spending increases income inequality in equilibrium as it increases the equilibrium public debt-to-capital ratio and the interest income of capitalists. Second, an increase in investment activity reduces income inequality in equilibrium as it increases the equilibrium capacity utilization rate. These effects are robust with respect to changes in the real interest rate. Chapter 3 pays attention to the impact of financial development on the interaction between economic growth and income inequality. As a financial system can develop in different forms, such as through a better access of the population to financial services, through an increased liquidity of the financial system or through a reduction of financial frictions to increase the efficiency of financial institutions and markets, the focus lies on the relevance of different types of financial development for the growth-inequality-nexus (Sahay et al. 2015). The chapter uses different subcomponents of the financial development index from the IMF (ibid.) to measure multiple forms of financial development (access to, depth and efficiency of financial institutions and financial markets). The panel conditionally homogenous vector autoregressive model serves as the methodological framework to analyze a broad panel of annual macroeconomic data ranging from 1980 to 2016 and covering 110 advanced and emerging economies. The econometric results suggest that, in general, a higher level of financial development leads to a stronger reduction in income inequality after an increase in economic growth. By splitting the overall level of financial development into its subcomponents and using different income shares of the income distribution, the empirical analysis shows that economic growth increases the income share of the bottom 10% of the income distribution when financial institutions and financial markets are deeper and financial markets are more efficient. Further, an increase in the income share of the top 10% income earners exerts a stronger positive impact on economic growth when financial institutions are more efficient. Additionally, the chapter finds empirical support for the trickle-up hypothesis which states that increases in the income position of low income groups will be beneficial for economic development as aggregate demand increases (Thirlwall 1994). Further, albeit limited, evidence is found for the trickle-down mechanism, which highlights the positive impact of increases in top income shares for lower income classes through an enhancement of investment possibilities (Aghion and Bolton 1997).