Woong Yong Park

Policy Regimes, Policy Shifts, and U.S. Business Cycles

Using an estimated DSGE model with monetary and fiscal policy interactions and allowing for equilibrium indeterminacy, we find that a passive monetary and passive fiscal policy regime prevailed in the pre-Volcker period. This gave rise to self-fulfilling beliefs and unconventional transmission mechanisms of policy shifts: unanticipated increases in interest rates increased inflation and output, while unanticipated increases in lump-sum taxes decreased inflation and output. We show that had the monetary policy regime of the post-Volcker era been in place pre-Volcker, inflation volatility would have been lower by 25% and the rise of inflation in the 1970s would not have occurred.

Yield Curve and Monetary Policy Expectations in Small Open Economies

This paper estimates a New Keynesian dynamic stochastic general equilibrium (DSGE) model in small open economies using the yield curve data as well as standard macro data. The DSGE model is estimated on the data of three inflation-targeting small open economies (Australia, Canada, and New Zealand) using Bayesian methods. We find that the long-end of the yield curve is highly correlated with the current and future short-term interest rates determined by domestic central banks. Yield curve data are particularly informative about the future stance of monetary policy in Australia and Canada in that the correlation between the model-implied monetary policy expectations and the ex-post realized policy interest rates increases when the yield curve data are used in estimation. In New Zealand, estimation results based on only macro data produce a high correlation between the model-implied interest rate expectations and the ex-post realized interest rates because information from the yield curve has been explicitly incorporated in monetary policy decisions. We also document that a persistent shock to the inflation target driving the average level of the yield curve in these three countries is highly correlated with long-horizon inflation expectations in the U.S., indicating stronger financial linkages.

Global Spillover Effects of US Uncertainty

We study spillover effects of US uncertainty fluctuations using panel data from fifteen emerging market economies (EMEs). A US uncertainty shock negatively affects EME stock prices and exchange rates, raises EME country spreads, and leads to capital outflows from them. Moreover, it decreases EME output, while increasing their consumer prices and net exports. The negative effects on output, exchange rates, and stock prices are weaker, but the effects on capital and trade flows stronger, for South American countries compared to other EMEs. We present a model of a small open economy that faces an external shock to interpret our findings.