PhD defence: Søren Hove Ravn


"Essays on the Interactions between Financial Markets, the Macroeconomy, and Economic Policy"


This dissertation consists of four chapters.

In chapter 1, I study empirically whether monetary policy in the US has featured an asymmetric reaction to stock prices in the years leading up to the crisis. Using a daily dataset, I show that interest rates have been cut in response to declining stock prices, whereas monetary policy has remained inactive when stock prices rose. This result is confirmed using lower-frequency data.

In chapter 2, I use a Dynamic Stochastic General Equilibrium (DSGE) model to study the impact of such a policy on macroeconomic outcomes, and investigate how an asymmetric policy interacts with already existing asymmetries in the way stock markets affect the macro economy. I show that an asymmetric policy of this type gives rise to an asymmetric business cycle, as well as an additional, expectations-driven increase in stock prices in response to a positive shock to the economy.

In the third chapter, I study the macroeconomic implications of countercyclical movements in banks’ lending standards, which have been documented in empirical studies. This is done by introducing profit-maximizing banks and a version of relationship banking into a DSGE model. I find that countercyclical credit standards tend to amplify business cycle fluctuations, although this amplification is quite modest at the macroeconomic level.

Chapter 4 contains an empirical study of the effects of fiscal policy in Denmark. The results of this chapter suggest that changes in government spending have a rather large but very short lived effect in Denmark. Moreover, the results confirm that the fiscal multiplier is far from constant over time. It was low in the 1970’s and 1980’s, but has been larger in the last two decades when Denmark has had a credibly fixed exchange rate and sound public finances.