Essays on Macroeconomics and Asset Pricing
A significant theoretical literature suggests that the effects of open market operations and large scale asset purchases are limited when short-term interest rates are constrained by the zero-lower-bound (ZLB). This view is supported by a growing body of empirical evidence that points to the tepid response of the U.S. economy to extraordinary policy measures implemented by the Federal Reserve (Fed) during the past several years. In the first essay, Effective Monetary Policy at the Zero-Lower-Bound, I show that permanent open market operations (POMOs), defined as financial market interventions that permanently increase the supply of money, remain relevant at the ZLB and can increase output and inflation. Consequently, I argue that the limited success of Fed policy in recent years may be due in part to the fact that it failed to generate sufficient money creation to support economic recovery following the Great Recession. I then demonstrate that conducting POMOs at the ZLB may improve welfare when compared to a broad range of policy regimes, and conclude by conducting a robustness exercise to illustrate that money creation remains relevant at the ZLB when it is not necessarily permanent. With these results in hand, I explore the consequences of Fed QE more directly in a framework asset purchases are an independent instrument of monetary policy. In the second essay, Effective Quantitative Easing at the Zero-Lower-Bound, I show that the observed lack of transmission between U.S. monetary policy and output economic activity a consequence of the fact the Fed engaged in what I define as sterilized QE: temporary asset purchases that have a limited effect on the money supply. Conversely, I show that asset purchase programs geared towards generating sustained increases in the money supply may significantly attenuate output and inflation losses associated with adverse economic shocks and the ZLB constraint. Furthermore, these equilibrium outcomes may be achieved with a smaller volume of asset purchases. My results imply that Fed asset purchase programs designed to offset the observed declines in the U.S. money supply could have been a more effective and efficient means of providing economic stimulus during the recovery from the Great Recession. The third essay—which is joint work with Apollon Fragkiskos, Harold Spilker, and Russ Wermers— titled Buyout Gold: MIDAS Estimators and Private Equity, we develop a new approach to study private equity returns using a data set first introduced in Fragkiskos et al. (2017). Our innovation is that we adopt a mixed data sampling (MIDAS) framework and model quarterly private equity returns as a function of high frequency factor prices. This approach allows us to endogenize time aggregation and use within-period information that may be relevant to pricing private equity returns in a single, parsimonious framework. We find that our MIDAS framework offers superior performance in terms of generating economically meaningful factor loadings and in-sample and out-of-sample fit using index and vintage-level returns when compared with other methods from the literature. Results using fund-level data are mixed, but MIDAS does display a slight edge. Concerning appropriate time-aggregation, we show that there is significant heterogeneity at the vintage level. This implies highly aggregated private equity data may not properly reflect underlying performance in the cross section.