Policy Shifts: Evidence from Inflation Targeting and Social Security Reforms

This dissertation investigates the effects of key policy changes affecting the global macroeconomy, on the one hand, and social security income of older workers on the other. While the settings of the two chapters are quite different, they highlight the fact that policy shifts play a major role in either maintaining the stability of the macroeconomy or altering the income path of ordinary workers. The first chapter asks whether inflation targeting (IT) “just got lucky” in the sense that its adoption just happened to coincide with a more tranquil macroeconomic environment or whether it can be credited with contributing to a more stable macroeconomic structure. Using a relatively novel time-series approach, I find that the observed moderation in inflation volatility may be attributed largely to a more stable structure associated with the introduction of IT and less to the consequence of milder shocks. Meanwhile, the observed tranquility in the business cycle is driven solely by much less violent shocks which have offset what appears to be a less stable structure seemingly arising from the IT framework. Results provide indirect evidence that the achievement of low and stable inflation may have come at the expense of output stabilization, as predicted by theory. Meanwhile, the second chapter revisits the 1983 Social Security reforms to examine how a large and potentially unanticipated wealth shock affects elderly workers. Using difference-in-differences model which exploits the nonlinear design of the reforms, I find that both male and female workers responded to the policy change by altering their labor supply, but only when they very close to the normal retirement age. In addition, there is evidence that affected workers also responded through higher savings prior to retirement. Nonetheless, the reforms appear to have disproportionate effects with some lower-educated workers remaining in the labor force in later years. Results suggest that enhancing public understanding of the implications of future reforms could mitigate potential adverse effects particularly on vulnerable subpopulations.