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Unformatted text preview: Econ407 Advanced Macroeconomics Exam # 2 Suggested Solutions December 15, 2008 Instructor: Jos e Tessada Instructions : The exam consists of 5 questions, with a total of fifteen parts. Each one is worth two points , thus the exam has thirty points total . Please read carefully the instructions. Be concise, go straight to the point unless explicitly required to link different arguments. Write less than 10 lines per question. Writing long answers makes it harder for the grader to find the right arguments, thus restrain yourself from using too many words. Question 1 Short questions In this questions you need to choose 5 out of 6 parts. If you try to answer more than 5 parts, please make sure you mark very clearly the 5 answers you want to be considered; if you answer more than 5 and do not mark them, your best answer in this question will not be counted in the final score. (a) Bernanke and Gertler mention that three puzzles arise when we want to understand the effects of monetary policy according to the conventional analysis. Mention and explain two of these three puzzles. Make sure you explain in what sense they are considered to be puzzles. Answer. They mention the following three puzzles: (1) The magnitude of the policy effect: the economy show strong effects of monetary policy changes that have relatively small effects on the interest rates. (2) Timing: while the effect of monetary policy on interest rates disappears after 9 months, some parts of spending react only after most of the effect has passed, and the larger effects are seen even later. (3) Composition: while monetary policy affects mostly short-term interest rates (think of in- terbank rates for example), some of the variables that react very strong to it are variables that should be related mostly to long-term interest rates (e.g., long-term mortgages). (b) What is the main hypothesis that Rajan and Zingales test in their work? Do they find empirical support for their hypothesis? Explain. Answer. Rajan and Zingales study whether there is a connection between the financial sector and growth. Their hypothesis is that if finance is related to growth, then in countries with worse financial systems sectors the difference in the growth rates between with higher and low dependence on external finance (or needs for external financing) should be larger than in countries with better financial sectors. The basic idea is that the financial sector quality is more beneficial for the sectors that require access to external funds for growing, hence, those should have worse experiences wherever the financial sector is not well developed (i.e., works less efficiently). Using a dataset with information for many sectors and countries, and regression analysis they find exactly this pattern in the data....
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- Spring '09