ESSAYS IN MACROECONOMICS: A DSGE APPROACH

Abstract

This dissertation consists of two independent essays in macroeconomics. The first essay examined environmental policy and convexity of climate change damage functions while the second one analyzed the impact of Covid-19 pandemic on the Thai economy.

Environmental Policy and Convexity of Climate Change Damage Functions: An Experiment with New Keynesian DSGE model. The paper seeks out to investigate how varying degree of convexity of climate change damage function affect economic output and the dynamic response of macroeconomic variables to shocks under different environmental policy regimes. In an economy featuring nominal rigidities and monopolistically competitive firms together with climate change mitigation policy and firm abatement effort, the results show that the choice of damage function affects long term growth of the economy and the performance of climate mitigation policy. A highly convex climate damage function has a significant contractionary effect on economic output and by extension consumption and private investment. This result stands irrespective of the environmental policy put in place. The impact of exogenous shocks on the macroeconomic variables is higher the higher the degree of convexity of the damage function. Cap-and-trade policy compresses the response of macroeconomic variables to these shocks, irrespective of curvature of the damage function. The results are robust to different calibration of the climate damage functions.

Impact of Covid-19 On the Thai Economy and The Effectiveness of Monetary Policy: A Bayesian DSGE Model Approach. This study estimates a medium scale dynamic stochastic general equilibrium (DSGE) model for the Thai economy to evaluate the impact of the Covid-19 containment policy on the key macroeconomic aggregates. Shock to labor supply is considered the main transmission channel. We discuss the role of monetary policy in the economic recovery and also identify dominant shocks driving the business cycle. Thai quarterly series from 2011Q1 to 2021Q2 is used for the Bayesian estimation of the model. Though the pandemic shock caused sharp decline in output, consumption and investment, the results suggest a fast recovery in growth rates of the variables in about 2.5 years. At the same time, the dominant shocks that account for output variation in the medium to long term are investment, labor supply, productivity and monetary policy shocks. This revealed the important role of monetary policy in the economic growth of Thailand. The key drivers of Thai household consumption in the long run are investment, labor supply, productivity and monetary policy shocks. On average, investment shock appears to be the key driver of the business cycle at all horizons.

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