Essays in Empirical Macroeconomics

Abstract

This dissertation features three chapters that each make relevant contributions to economic research. The first two chapters focus on expectations that take center stage in modern macroeconomics. We focus on firm expectations about their own variables. For the empirical analysis, we use the German ifo survey and, additionally, in the second chapter, an Italian firm survey run by the Banca d’Italia. The third chapter changes focus on the current debate about decoupling or de-risking in international trade. It introduces a novel type of trade costs into a gravity model and presents a new panel on sectoral trade. The first chapter consolidates what we know about firm expectations about their own variables. We illustrate the findings gathered from different surveys using the German ifo survey of firms. It distils six stylized effects facts about firm expectations about their own variables. Then it discusses the expectation formation of firms and concludes by considering the causal effect of firm expectations. The second chapter zooms in on the expectation formation of firms about their own prices and production. We find that how firms react to news crucially depends on the type of news. We distinguish micro news and macro news. Micro news is about firms’ own developments, and macro news is about the aggregate economy. Based on the ifo survey and a survey of Italian firms, we show that firms overreact to micro news and underreact to macro news. We propose a general-equilibrium model with “island illusion” to explain these patterns in the data. This way, we contribute to efforts to flesh out the expectation-formation process in greater detail and, eventually, converge to a new paradigm for rational expectations. The third chapter is single-authored. I started working on it during my internship at the Bundesbank in the summer of 2022. It introduces a novel trade cost to gravity models of international trade. I find that an increase in political distance predicts a significant decrease in bilateral trade, controlling for time-constant pair characteristics, tariffs, and economic integration agreements. I use this insight to construct a counterfactual decoupling scenario for 2018 that mimics political distances during the Cold War. There is a substantial reshuffling of trade in this scenario.