Macroeconomics, Monetary Theory and Policy
Econometric Theory
Applied Econometrics and Computational Economics

Macroeconomics, Monetary Economics, Economic Growth, Business Cycles
Econometric Theory, Applied Econometrics, Time Series, Panel Data

(Oral) May 2001, Econometrics; November 2001, Macroeconomics (with distinction)
(Written) May 2000, Microeconomic and Macroeconomic Theory

Essays on Deflation, Monetary Policy, and Macroeconomic Stability and on Income Distribution Dynamics

Professor Peter C. B. Phillips
Professor Giuseppe Moscarini
Professor Christopher Sims
Dr. James Bullard

May 2004

M. Phil. in Economics, Yale University, December 2002
Diploma, Summer School in Economic Theory (Intertemporal Macro), SET, Venice, Italy, July 2002
M.A. in Economics, Yale University, May 2001
M.Sc. in Econometrics and Mathematical Economics, London School of Economics, June 1999
Licenciatura in Economics, University of Coimbra (Portugal), July 1997
Diploma in Portuguese Language and Culture, University of Coimbra, July 1991

Dissertation Intern Fellowship, Federal Reserve Bank of St. Louis, MO, 2003
Cowles Prizes, Cowles Foundation for Research in Economics, 2000, 2001, 2002, 2003
Portuguese Foundation for Science and Technology Fellowship, 2001-2003
Yale University Teaching and Dissertation Fellowships, 1999-2002
London School of Economics Funded Graduate Studentship, 1997-1999
Overseas Research Student (ORS) Awards, Committee of Vice-Chancellors and Principals of UK Universities, 1997, 1999
Sir Richard Stapley Educational Trust Bursary, 1997
First Prize in Regional Economics, Coordination Commission for the Central Region, Portugal, 1997
Joint First Prize, Portuguese Association for Regional Development, Portugal, 1996
Annual Fundação Oriente Scholarships, Portugal, 1992-1997
Annual ICALP Scholarships, Instituto de Cultura e Língua Portuguesa, Portugal, 1989-1991
Annual Foreign Ministry Scholarship, Chinese Foreign Ministry, 1988-1989

Lecturer (Linux and Matlab), Statlab and Department of Economics, Yale University, 2002
Teaching Assistant, Graduate Macroeconomics, Yale University, Spring 2002
Teaching Assistant, Graduate Macroeconomics, Yale University, Fall 2001

Dissertation Intern, Research Department, Federal Reserve Bank of St. Louis, MO, 2003
Visiting Scholar, Department of Economics, Princeton University, 2003
Intern, Research Department, International Monetary Fund, Washington, D.C., 2001
Research Assistant to Professor Peter Phillips, Cowles Foundation for Research in Economics, 2000
Research Assistant to Professor Donald Brown, Yale University, 2000

Econometric Theory Journal Assistant, Cowles Foundation for Research in Economics, 2001-2003
Consultant, Statlab (Statistical Laboratory), Yale University, 2001-2002
Professional Translator and Interpreter (Chinese-Portuguese-English), 1991-1997

"Central Bank Balance Sheet Concerns, Monetary and Fiscal Rules and Macroeconomic Stability," manuscript, Yale University, 2003 [First job market paper].

"A Nonparametric Analysis of the Shape Dynamics of the US Income Distribution: 1962-2000," 2002, under review for Review of Economics and Statistics [Second job market paper].

"The Fragility of the Phillips Curve: A Bumpy Ride in the Time and Frequency Domains," manuscript, Yale University, 2002.

"An LM Test for the Null of Cointegration," manuscript, Yale University, 2001.

"Long Memory and Persistence in Macroeconomic Time Series," manuscript, Yale University, 1999.

"The Regional Economic Impact of the University of Coimbra," with Paulo Ferreira, monograph published by the Coordination Commission for the Central Region, Portugal, 1996.

"Testing the Output-Inflation Trade-off: Some Time Series Evidence," University of Coimbra, 1995.

"Deflationary Spiral, Monetary and Fiscal Policies and Business Cycle Fluctuations."
"Exact and Asymptotic Distributions for Normalized Data under Multimodality."

7th CEMAPRE Conference, Lisbon, Portugal, September 2003
North American Meeting of the Econometric Society, Evanston, IL, June 2003
Research Department Seminar, Federal Reserve Bank of St. Louis, MO, June 2003
Departmental Seminar, Universidade Nova de Lisboa, Lisbon, December 2002
European Winter Meeting of the Econometric Society, Budapest, Hungary, November 2002
Inter-University Graduate Student Conference, Princeton University, NJ, October 18, 2002
17th Annual Meeting of the European Economic Association, Venice, Italy, August 2003
Yale Econometrics and Macroeconomics seminars, Yale University, 2000-2003
London School of Economics seminars, 1997-1999

Member of the European Economic Association (EEA), since 2002
Member of the Institute of Mathematical Statistics (IMS), since 2000
Member of the Econometric Society (ES), since 1999
Member of the American Economic Association (AEA), since 1998
Member of the LSE MSc. Econometrics and Mathematical Economics Society, since 1998

Chinese (native), Portuguese and English (fluent), French and Spanish (intermediate)

My dissertation consists of four essays. In the first and third essays, we study the implications for macroeconomic stability of monetary policy making in a new era of price stability. In the second chapter we use adaptive kernel density estimation and adaptive multimodality test to analyze the US income distribution dynamics. The last essay proves that the distributional properties of the original income data do not change after data normalization.

I. Central Bank Balance Sheet Concerns, Monetary and Fiscal Rules, and Macroeconomic Stability
   [First Job Market Paper, Macroeconomics]

We provide a fully articulated theoretical foundation for the view that a central bank’s (CB) concern with its balance sheet may hinder monetary policy "activism" needed to achieve aggregate stability. Departing from the existing literature, we model the CB and the fiscal authority as two independent entities, each with its own separate budget constraint. We augment the conventional interest rate rule with net worth targeting by the CB, where the CB net worth (NW) is defined as the difference between its assets and liabilities.

Focusing on a monetary system where fiscal backing for monetary policy is absent and the CB adjusts its policy to ensure a positive NW, monetary activism embodied in the Taylor Principle cannot be applied to its full extent. We show that net worth targeting leads to local indeterminacy of the targeted steady state equilibrium, reversing the well-known result that an active interest rate rule combined with a passive fiscal rule ensures local uniqueness of the equilibrium. Local indeterminacy implies the existence of an infinite number of stable equilibrium solutions which are all compatible with the same active monetary policy rule, putting in doubt the claim that such a policy stabilizes the economy. Moreover, a Hopf bifurcation emerges around the targeted equilibrium, suggesting a dramatic change in the local stability properties of the equilibrium due to very small changes in the NW targeting parameter. CB balance sheet concerns build into the economic system an inherent tendency towards structural instability, making it more likely for an economy to drift towards the liquidity trap equilibrium even under an active interest rate rule.

Our results suggest that because of balance sheet concerns, the Bank of Japan may not have fully exploited its "easy money" policy. This may have led to a prolonged period of deflationary recession. To avoid the undesirable consequences of CB balance sheet concerns, institutional reforms may be needed to guarantee an automatic, immediate fiscal backing for monetary policy, and better monetary-fiscal cooperation in an era of price stability.

II. A Nonparametric Analysis of the Shape Dynamics of the US Income Distribution: 1962-2000
    [Second Job Market Paper, Econometrics and Macroeconomics]

Previous studies of income distributions focusing on a number of summary statistics can only partially capture characteristics of such distributions. Parametric models fitted to income data are all unimodal and often rejected by the data. We take a nonparametric approach to examine the evolution of the shape and intra-distributional dynamics of the U.S. income distribution from 1962 to 2000, using the US Current Population Survey data.

Conventional fixed-bandwidth kernel methods, when applied to long-tailed distributions, suffer from the drawback that the bandwidth h is constant across the entire sample. In our adaptive version, we compute a local bandwidth parameter, which allows us to adapt h to local density of the data. Adaptive kernel density estimation makes it possible to purge spurious noises in the tails while preserving essential characteristics in the central part of distribution. Mode testing based on the adaptive method is more accurate. We apply an adaptive version of Silverman's bootstrap test for multimodality. Mode testing is useful for detecting underlying component income densities for population subgroups and for assessing the degree of population heterogeneity, which enables us to uncover distinct income distribution dynamics for different population subgroups.

Our results indicate that from 1962 to 2000, multimodality has been a predominant feature of the US income distribution. Both the number and location of modes change over time, revealing important distributional dynamics and heterogeneity. In an attempt to "explain" the presence of multiple modes and the apparent heterogeneity in population income distributions, we decompose the sample by age, education, gender and race and carry out the same analysis for each subgroup. We detect strong differences in income dynamics for different population subgroups, and all subgroups exhibit multiple modes and follow distinct distributional patterns.

III. Deflationary Spiral, Monetary and Fiscal Policies and Business Cycle Fluctuations [in progress]

We analyze deflation and the zero lower bound (ZLB) on nominal interest rates in a dynamic stochastic general equilibrium (DSGE) model with nominal price and wage rigidities. We study the business-cycle properties of price deflation and investigate the implications of the ZLB for macroeconomic stability, with explicit roles for government policies. We quantify macroeconomic effects of the ZLB through stochastic simulations of the DSGE model, in two alternative settings of moderate (1% to 3%) and low (-2% to 0%) average inflation rates. The simulation results are compared to actual US and Japanese data. We use a Bayesian approach to evaluate the performance of our DSGE model against VAR models by conducting posterior analysis and computing Bayesian factors and posterior odds using Monte Carlo Markov Chain methods.

Locally solving our model by linearizing around the target and liquidity trap steady states is uninformative on transitional dynamics and equilibrium trajectories that emerge beyond the small neighborhood around the steady states. Global solution of the model is critical. To obtain global solutions under rational expectations, we deal with the fundamental nonlinearity of the occasionally binding ZLB on nominal interest rates by the method of parameterized expectations, using Chebyshev polynomials as basis functions.

This analysis allows us to evaluate realistically the risk of a deflationary spiral in the US and Japanese economies, and to better understand how business-cycle properties are affected when an economy falls into a liquidity trap and the ZLB becomes binding. It helps us to understand better what combinations of monetary and fiscal policies would help to prevent an economy from falling into a trap, and to pull it out of a trap once it has fallen into one.

IV. Exact and Asymptotic Distributions for Normalized Data under Multimodality [in progress]

We investigate whether the asymptotic and exact distributions of the original raw data change after data normalization, such as divisions by mean, median, range, inter-quartile range, sum and maximum. Empirical analyses using normalized data, such as our analysis of the US income distribution, are valid only to the extent that the distributional properties of the original data remain unchanged. Under the assumption of finite mixture of parametric distributions, we show that distributional properties of the original data are preserved in normalized data. When the component densities in the original data are well-separated so that multiple modes emerge, the component densities in the transformed data are also well-separated. Normalization by maximum will not change the number of modes present in the data.