Tuesday, 15 August, 2017 | 12:00 | Defense

Volha Audzei: “Essays on Macroeconomic Models with Imperfect Information”

Dissertation Committee:
Sergey Slobodyan (chair)
Michal Kejak
Filip Matějka


This dissertation analyzes how relaxing the assumption of rational expectations modifies the output of macroeconomic models. In particularly we show how imperfect information among the financial agents modifies their risk-taking decisions, the effect of monetary policy on banks’ lending or equilibrium selection.

In the first paper we incorporate a model of the interbank market into a standard DSGE model, with the interbank market rate and the volume of lending depending on market confidence and the perception of counterparty risk. As a result, a credit crunch occurs if the perception of counterparty risk increases. Changes in market confidence then can generate credit crunches and contribute to the depth of recessions. We conduct an exercise to mimic some central bank policies: targeted and untargeted liquidity provision, and reduction of the reserve rate. Our results indicate that policy actions have a limited effect on the supply of credit if they fail to influence agents' expectations. A policy of a low reserve rate worsens recessions due to its negative impact on banks' revenues. Liquidity provision stimulates credit slightly, but its efficiency is undermined by liquidity hoarding.

The second paper is devoted to a problem of excessive risk-taking by financial agents. Recent central banks' policies stimulated a debate whether these policies contribute to the building up of another credit boom. In this paper we build a theoretical model which captures excessive risk-taking in a form of an increased risk appetite and decreased incentives to acquire information. As a result, with market risk being reduced, agents tend to acquire more risk in their portfolios then they would with the higher market risk. The same forces increase portfolio risk when the safe interest rate is falling.

In the third paper, together with Sergey Slobodyan, we study if initially mis-specified equilibrium (the Restricted Perceptions Equilibrium, or RPE) is compatible with the equilibrium choice of sparse weights, developed recently by Gabaix, 2014. We find that the agents stick to their initial mis-specified AR(1) forecasting model choice if the feedback from expectation in the model is strong or included variable becomes more persistent. We also identify a region in the parameter space where the agents find it advantageous to pay attention to no variable at all.




Full Text: “Essays on Macroeconomic Models with Imperfect Information” by Volha Audzei