Essays on Applied Macroeconomics

Abstract

This thesis consists of two self-contained essays on topics in applied macroeconomics. In the first chapter, I study how heterogeneous sensitivities to weather fluctuations and interregional production networks impact the measurement of weather shocks’ impact on economic activity in the United States. I start the analysis by building a general equilibrium model where the impact of weather fluctuations on productivity is state-sector dependent, and networks expose sectors to weather shocks from other regions through the use of intermediate inputs. Then, I quantify the relevance of these mechanisms, combining the model’s predictions with annual data on sectoral GDP and average temperatures by state from 1970 to 2019. My estimates show that models that do not consider these characteristics underestimate the aggregateimpact of weather fluctuations by at least a factor of 3. In particular, when the whole economy faces an unexpected increase in temperature of 1 Celsius degree, the contraction in economic activity increases from -0.13 to -0.37 percent once heterogeneity is considered and -1.14 percent when networks are included. In the second chapter, I propose a new methodology to disentangle between terms of trade movements caused by global shocks and those resulting from country-specific terms-of-trade fluctuations. This methodology extends the so-called maximum-share approach in two ways. Firstly, a global shock is identified as the shock with the highest explanatory power on the forecast error variance of a set of exogenous variables. This is in contrast to the typical approach of using only one variable as a source of information to identify a shock. Secondly, country-specific terms-of-trade shocks are identified as shocks that satisfy two conditions: (i) maximum explanation power on terms-of-trade variability and (ii) orthogonality to global shocks, allowing me to isolate the main drivers of terms of trade that are not related to global fluctuations. I apply this methodology to data on ten small open economies(SOEs) and show that global shocks contribute - on average- to 33 percent of their business cycle fluctuations. The contribution of global shocks to terms-of-trade variability is close to 20 percent, meaning that around 80 percent of terms-of-trade movements have country-specific origins. Interestingly, on average, country-specific terms-of-trade shocks are responsible for less than 10 percent of SOE business cycle variability. These results help to reconcile current estimates on the importance of terms of trade and suggest an intensive evaluation of the origins of terms-of-trade movements by policymakers before any intervention.