Book Description

This dissertation presents two chapters on empirical models of macroeconomics and finance, and one chapter on a theoretical model for conducting monetary policy. The first chapter applies machine learning algorithms to construct non-parametric, nonlinear predictions of mortgage loan default. I compile a large dataset with over 20 million loan observations from Fannie Mae and Freddie Mac, for the period 2001-2016 at the quarterly frequency. Different machine learning algorithms are applied to predict in sample (training sample), and to forecast out-of-sample (testing data). I find that the forecast performance of nonlinear and non-parametric algorithms are substantially better than the traditional logit model. Additionally, machine learning algorithms allow identification of the predictive power of specific variables. The results indicate that loan age is the most important predictor of loan default before and after the 2008 financial crisis. However, I find that market loan- to-value is the most effective predictor of mortgage loan default during the recent financial crisis. Finally, I use machine learning to formulate risk-based capital stress tests for Fannie Mae and Freddie Mac under different scenarios. I forecast their mortgage credit losses and associated capital needs during the financial crises. The results obtained are more accurate than those from the Federal Housing Enterprise Oversights (OFHEO), and other existing stress test studies. In the second, and third chapters, I tested the effectiveness of Monetary policy by empirical, and theoretical models. With the severity of the 2008 financial crisis, and apparent inefficacy of traditional monetary and fiscal policies, the Federal Reserve together with the U.S. government introduced unconventional policy measures. The Large Scale Asset Purchase (LSAP) and Troubled Asset Relief Program (TARP) are some of these policies introduced by the Federal Reserve and Department of Treasury. While these policies may have been important in preventing a deepening of the financial crisis and laying the foundation for the economic recovery, there were collateral effects on bank profitability. In this chapter, I study the impact of both the LSAP and TARP programs on banks? profit and risk taking using a large panel. The results indicate that these programs had a positive effect on banks? profit (Chapter 2). In chapter three, I use a small-scale DSGE model for the economy of Iran to analyze monetary policy. The model is extended to include housing and oil sectors. The model is adapted for the peculiarities of Iran's Central Bank, which uses money supply as a function of oil income and production growth. I study the reaction function of the model to technology, oil, and monetary shocks in this specific Iranian monetary policy framework. The results show that monetary shocks has only nominal effect on inflation but not on the real sector such as investment, consumption, or production. Also, positive oil income shocks lead to an increase in inflation instead of an increase in production.