Ufuk Devrim Demirel

Affiliated Faculty

Graduate School of Arts and Sciences

University of Colorado at Boulder


Macroeconomic Analysis Division
Congressional Budget Office
Ford House Office Building, 456C
Washington, DC 20515
Tel: (202) 226-2762


Curriculum Vitae

Download PDF


Published and Forthcoming Papers

On the Cyclicality of Credit

Macroeconomic Dynamics, forthcoming.

This study documents the cyclical properties of business credit in the U.S. and in the Euro area and constructs a theoretical model that can successfully replicate the observed characteristics. I find that real business loans lag output, i.e., business credit is more strongly correlated with past output than with current output. Furthermore, real business loans correlate negatively with future output and investment and positively with past output and investment. I show that a fairly standard model of business and credit fluctuations with agency costs can neither generate the lagging behavior of business credit nor can it induce the observed cross-correlation patterns of output, investment, and business loans. I introduce a costly financial intermediation mechanism to an otherwise standard macroeconomic framework and show that the evolution of intermediary balance sheets and interaction of intermediation and agency costs can induce the observed regularities.

Gains from Commitment in Monetary Policy: Implications of the Cost Channel

2013, Journal of Macroeconomics 38, 218-226.

Many empirical studies find robust evidence that marginal cost of production directly depends on the nominal rate of interest. This relationship induces a cost channel for monetary policy transmission. Although the empirical literature provides ample evidence for a cost channel, studies that evaluate the welfare gains from monetary policy commitment have so far entirely ignored its presence. This study shows that, overlooking the cost channel, one significantly underestimates the welfare gains from monetary policy commitment. Using a version of the new Keynesian model calibrated to the U.S. economy, I find that failure to take into account the presence of a cost channel leads to an understatement of the gains from monetary policy commitment by an amount equivalent to a 0.53% permanent cut in quarterly inflation.

The Value of Monetary Policy Commitment Under Imperfect Fiscal Credibility

2012, Journal of Economic Dynamics and Control 36, 813-829. (Lead Article)

A central finding of the previous monetary policy research is that commitment to a policy rule results in substantial welfare gains. In this paper, I reevaluate the value of monetary policy commitment in an environment where monetary and fiscal policies are conducted by separate branches of the government. I find that welfare gains from monetary policy commitment can be small if the fiscal authority can exercise a certain degree of commitment on his own. I also find that a moderate improvement in fiscal credibility can substantially reduce the welfare gains from full commitment in monetary policy under monetary leadership. Under fiscal leadership, the degree of fiscal credibility does not affect the welfare gains from monetary commitment.

On the Identification of Technology Shocks: An Alternative to the Standard Long-Run Method

2012, Theoretical Economics Letters, Vol.2, No 5.

This study proposes an alternative procedure to identify technology shocks using vector autoregressions (VARs). The proposed procedure delivers improved small-sample properties relative to the standard long-run identification method provided that the dynamics of the observed variables can only be captured precisely by an infinite-order VAR. Monte Carlo experiments on artificial data produced by a standard version of the real business cycle model demonstrate that the proposed procedure is associated with smaller average bias and mean square error. These results obtain under a range of specifications regarding the share of technology shocks in overall output variability.

Macroeconomic Stabilization in Developing Economies: Are Optimal Policies Procyclical?

2010, European Economic Review 54, 409-428.

Many empirical studies provide evidence that macroeconomic policies as well as capital flows exhibit procyclical characteristics in developing economies. In particular, Kaminsky et al. [2004. When it rains, it pours: Procyclical capital flows and macroeconomic policies. NBER Macroeconomics Annual, MIT Press] demonstrate that a large group of middle-income countries run contractionary policies and experience capital flight during times of recession. This paper investigates the role of international financial markets in explaining these macroeconomic policy and capital flow characteristics. An optimal fiscal and monetary policy problem is formulated and solved for a small-open economy that faces a country-specific interest rate spread in international financial markets. It is found that, in the presence of the country spread, optimal fiscal and monetary policies as well as capital flows are procyclical under a reasonable parametrization. Optimal policies and capital flows turn countercyclical in the absence of the country spread. This pattern is robust to a range of alternative model specifications.

Optimal Monetary Policy in a Financially Fragile Economy

2009, The B.E. Journal of Macroeconomics (Contributions), Vol. 9, Article 15.

This paper studies optimal monetary policy in an economy where firms rely heavily on external funds to finance operational costs. In the model, financial contracts are subject to agency problems and firms can possibly default on borrowed funds. Financial frictions have two separate effects on the model. First, they introduce an indirect cost channel to the monetary transmission mechanism. Second, they exacerbate the welfare costs of output gap fluctuations. The indirect cost channel implies that a given reduction in inflation can be achieved with a smaller output loss. This effect encourages the policy maker to emphasize inflation stabilization. At the same time, agency costs also make output gap fluctuations more costly in terms of economic welfare. This second effect encourages the policy maker to place more emphasis on output gap stabilization. Whether the optimal policy requires greater inflation stabilization or output gap stabilization depends on the balance of these two effects. Under a reasonable parametrization, the first effect dominates the second and the optimizing policy maker adopts a stricter anti-inflationary stance.

The Transmission of Foreign Interest Rate Shocks to a Small-Open Economy: The Role of External Debt and Financial Integration

2009, The B.E. Journal of Macroeconomics (Contributions), Vol. 9, Article 3.

This paper investigates the implications of external indebtedness and international financial integration on the effects of foreign interest rate shocks in a small-open economy. The empirical component of the analysis quantifies the effects of U.S. interest rate shocks on the Turkish economy. The theoretical component constructs a business cycle model that can successfully match the empirical impulse response functions. The model is estimated on quarterly Turkish data. It is found that the relationship between financial integration and macroeconomic volatility due to foreign interest rate shocks depends on the level of outstanding external debt. Financial integration mitigates the economy’s responses to foreign rate shocks for higher levels of external debt and it magnifies the responses for lower levels of external debt.

Working Papers

Identification of Technology Shocks Using Misspecified VARs, Conditionally Accepted for Publication in Canadian Journal of Economics

Studies that seek to evaluate the effects of technology shocks often employ structural VARs identified with long-run restrictions. In the presence of a mismatch between the number of lags the data-generating process involves and the number of lags included in the VAR, estimates based on long-run restrictions can be largely biased. In this paper, I offer an alternative method that substantially reduces this bias associated with the standard long-run procedure. I also show how the method can be employed to reduce misspecification bias in a large class of maximum-share-type identification problems. I assess the performance of the proposed method using Monte Carlo simulations and demonstrate that it outperforms the standard long-run method under most commonly adopted versions of the real business cycle and new Keynesian models. Application of the procedure to the post-war U.S. data reveals that per-capita hours exhibit a positive hump-shaped impulse response profile in the face of a technology shock.

Economic Liberalization and Macro Volatility: The Turkish Experience, Under Review.

This study empirically investigates the implications of trade and financial market liberalization on macroeconomic volatility in Turkey. Structural stability tests on yearly Turkish data reveal that output growth volatility has increased significantly after the implementation of a series of reforms towards enhanced integration with international goods and credit markets. Adopting a vector autoregression methodology, it is shown that U.S. interest rate fluctuations emerged as a major driving force of domestic business cycles in Turkey after capital account liberalization.

Optimal Policy, Government Size and Macroeconomic Volatility, Mimeo.

There is substantial evidence in the literature supporting a negative association between government size and output/consumption volatility. The standard real business cycle framework fails to capture this correlation. This study formalizes an optimal fiscal and monetary policy problem in a sticky-price environment where the government sets the nominal interest rate and determines the level of public good provision. It is shown that for a reasonable set of parameter values, the model can explain the empirical regularity that the government size is negatively correlated with the consumption and output volatility as the outcome of an optimizing policy framework, without making ad hoc assumptions about government behavior.

On The Political Economy of Monetary Policy and Exchange Rate Regimes, Mimeo.

Can political incentives and characteristics of income distribution explain monetary policy and exchange rate dynamics? I study this question in a framework where the government depends systematically on inflation tax to finance expenditures on public goods. This setting introduces a conflict of interests among households concerning the level and responsiveness of nominal interest rates. I show that higher levels of income inequality may generate higher inflation rates and monetary policy can be pro-cyclical in economies where the portion of the national income that goes to the majority is smaller. Consequently, countries with higher levels of income inequality and less independent monetary institutions implement more rigid exchange rate management schemes.


Econ 7040: Graduate Macroeconomic Theory 2

Econ 3080: Intermediate Macroeconomic Theory