Browsing by Author "Burnside, A Craig"
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Item Open Access Aid, Policies, and Growth: Revisiting the Evidence(2004) Burnside, A Craig; Dollar, DavidBurnside and Dollar revisit the relationship between aid and growth using a new data set focusing on the 1990s. The evidence supports the view that the impact of aid depends on the quality of state institutions and policies. The authors use an overall measure of institutions and policies popular in the empirical growth literature. The interaction of aid and institutional quality has a robust positive relationship with growth that is strongest in instrumental variable regressions. There is no support for the competing hypothesis that aid has the same positive effect everywhere. The authors also show that in the 1990s the allocation of aid to low-income countries favored those with better institutional quality. This "selectivity" is sensible if aid in fact is more productive in sound institutional and policy environments. The cross-country evidence on aid effectiveness is supported by other types of information as well: case studies, project-level evidence, and opinion polls support the view that corrupt institutions and weak policies limit the impact of financial assistance for development. This paper - a product of the Development Economics Vice Presidency - is part of a larger effort in the Bank to research aid effectiveness.Item Open Access Asymmetric Correlations in Financial Markets(2013) Ozsoy, Sati MehmetThis dissertation consists of three essays on asymmetric correlations in financial markets. In the first essay, I have two main contributions. First, I show that dividend growth rates have symmetric correlations. Second, I show that asymmetric correlations are different than correlations being counter-cyclical. The correlation asymmetry I study in this dissertation should not be confused with correlations being counter-cyclical, i.e. being higher during recessions than during booms. I show that while counter-cyclical correlations can simply be explained by counter-cyclical aggregate market volatility, the correlation asymmetry with respect to joint upside and downside movements of returns are not just due to the heightened market volatility during those times.
In the second essay I present a model in order to explain the correlation asymmetry observed in the data. This is the first paper to offer an explanation for observed correlation asymmetry. I formalize the explanation using an equilibrium model. The model is useful to understand both the cross-section and time-series of correlation asymmetry. By the means of my model, we can answer questions about why some stocks have higher correlation asymmetry, and why the correlation asymmetry was higher during 1990s? In the model asset prices respond the realization of dividends and news about the future. However, price responses to news are asymmetric and this asymmetry is endogenous. Price responses are endogenously stronger conditional on bad news than conditional on good news. This asymmetry also generates the observed correlation asymmetry. The price responses are asymmetric due to the ambiguity about the news quality. Information about the quality of the signal is incomplete in the sense that the exact precision of the signal is unknown; it is only known to be in an interval, which makes the representative agent treat news as ambiguous. To model ambiguity aversion, I use Gilboa and Schmeidler (1989)'s max-min expected utility representation. The agent has a set of beliefs about the quality of signals, and the ambiguity-averse agent behaves as if she maximizes expected utility under a worst-case scenario. This incomplete information about the news quality, together with ambiguity-averse agents, generates an asymmetric response to news. Endogenous worst-case scenarios differ depending on the realization of news. When observing ``bad" news, the worst-case scenario is that the news is reliable and the prices of trees decrease strongly. On the other hand, when ``good news" is observed, under the worst-case scenario the news is evaluated as less reliable, and thus the price increases are mild. Therefore, price responses are stronger conditional on a negative signal and this asymmetry creates a higher correlation conditional on a negative signal than conditional on a positive signal. I also show that the results are robust to the smooth ambiguity aversion representation.
Motivated by the model, I uncover a new empirical regularity that is unknown in the literature. I show that correlation asymmetry is related to idiosyncratic volatility: the higher the idiosyncratic volatility, the higher the correlation asymmetry. This novel empirical finding is also useful to understand the time-series and cross-sectional variation in correlation asymmetry. Stocks with smaller market capitalizations have greater correlation asymmetry compared to stocks with higher market capitalization. However, an explanation for this finding has been lacking. According to the explanation offered in this paper, smaller size stocks have greater correlation asymmetry compared to bigger size stocks because small size stocks tend to have higher idiosyncratic volatilities compared to bigger size stocks. In the time-series, correlation asymmetry shows quite significant variation as well. The average correlation asymmetry is especially high for the 1990s and decreases significantly at the beginning of the 2000s. This pattern in times-series can also be explained in terms of the time-series behavior of idiosyncratic volatilities. Several papers including Brandt et al. (2010), document higher idiosyncratic volatilities during 1990s while the aggregate volatility stays fairly stable. Basically, the high idiosyncratic volatilities during the 1990s also caused greater correlation asymmetry.
In the third essay, I study the correlation of returns in government bond markets. Similar to the findings in equity markets, I show that there is some evidence for asymmetric correlations in government bond markets. First, I show that the maturity structure matters for correlation asymmetry in bonds markets: Unlike long-maturity bonds, shorter-maturity bonds tend to have asymmetric correlations. Second, I show that the correlation asymmetry observed in European bond markets disappears with the formation of a common currency area. Lastly, I study the correlation between equity and bond returns in different countries. For long-maturity bonds, correlations with the domestic equity returns are asymmetric for half of the countries in the sample, including the U.S. These findings show that results on asymmetric correlations from equity markets can generalize, at least to some extent, to other financial markets.
Item Open Access Capital Utilization and Returns to Scale(1995) Burnside, A Craig; Eichenbaum, Martin; Rebelo, Sergio TThis paper studies the implications of procyclical capital utilization rates for inference regarding cyclical movements in labor productivity and the degree of returns to scale. We organize our investigation around five questions that we study using a measure of capital services based on electricity consumption: (1) Is the phenomenon of near or actual short-run increasing returns to labor an artifact of the failure to accurately measure capital utilization rates? (2) Can we find a significant role for capital services in aggregate and industry-level production technologies? (3) Is there evidence against the hypothesis of constant returns to scale? (4) Can we reject the notion that the residuals in our estimated production functions represent technology shocks? (5) How does correcting for cyclical variations in capital services affect the statistical properties of estimated aggregate technology shocks? The answer to the first two questions is yes. The answer to the third and fourth questions is no. The answer to the fifth question is "a lot."Item Open Access Essays in Currency Markets(2023) Min, David HThis dissertation is comprised of three chapters, all with the aim to better understand currency behavior. The first chapter brings well-known, profitable currency trading signals to bear on the Meese-Rogoff puzzle (Meese and Rogoff (1983)), a robust finding regarding the difficulty of outperforming the random walk in forecasting nominal exchange rates in an out-of-sample fashion, particularly at short horizons, using macro aggregates. Using carry, momentum, and value trading signals, which resemble macro variables that have traditionally been considered in forecasting exchange rates, we find much more evidence of out-of-sample forecastability at short horizons when the signals are used in a cross-sectional, multilateral manner than in a time-series, bilateral manner. This suggests macro fundamentals may be more informative of exchange rates than previously thought, if considered jointly rather than pairwise as has conventionally been done. A caveat is that the forecast noise stemming from limited data availability renders both time-series and cross-sectional signals' outperformance against the random walk unreliable at short horizons in practice. The second chapter revisits the question of whether cross-sectional differences in currency excess returns can be accounted for by downside market risk. Estimating the downside risk model proposed by Burnside and Graveline (2014), a piecewise linear factor model that subsumes previous downside risk models of currencies, we find that downside market risk does a poor job in explaining the cross-section of currency portfolio returns, regardless of whether we use an equity-based or currency-based market factor. Even if the model were to price the cross-sectional returns well, we would still face counterintuitive factor model estimates that go against the basic assumption of risk aversion. That is, we find a downside market risk puzzle for currencies. The third chapter examines the relationship between fiscal sustainability and nominal exchange rate. Using the annual change in debt to GDP ratio as our measure of fiscal sustainability, we find that fiscal sustainability contains predictive information on exchange rate in both the time-series and cross-sectional dimensions, controlling for potentially confounding macroeconomic factors, and for up to three years. Impulse response estimates show that a shock to fiscal sustainability, i.e., an unanticipated increase in the debt ratio, induces a contemporaneous depreciation in exchange rate lasting for three to five years. All in all, we find strong evidence of a linkage between fiscal sustainability and nominal exchange rate.
Item Open Access Essays in Empirical Macroeconomics(2010) Vukotic, MarijaThis dissertation consists of three essays in empirical macroeconomics. In the first essay, I explore the dynamic effects of aggregate news about
future technology improvements on sectoral fundamentals. I document that the durable goods sector responds significantly more to news shocks than the nondurable goods sector. By looking at the behavior of inventories, which have been largely neglected in the news literature, I show that aggregate news propagates the business cycle mainly through the durable goods sector. My theoretical framework is a two-sector, two-factor, real business cycle model augmented with the following three real rigidities: habit persistence in consumption, variable capacity utilization, and investment adjustment costs in both sectors. In addition, I introduce inventories as a factor in the production of durable goods. The model is successful in replicating the empirical responses of the US economy to news shocks. It reproduces the stronger response of the durable goods sector and can perfectly match the responses of inventories.
The second essay, which is joint work with Roberto Pancrazi, evaluates the effects of a change in monetary policy on the decline of the volatility of real macroeconomic variables, and on its redistribution from high to medium frequencies during the post-1983 period. By using a dynamic stochastic general equilibrium model, we find that the monetary policy alone cannot account for the observed changes in the spectral density of output, investment, and consumption. However, when we also consider a change in the exogenous processes, a different monetary policy accounts for $40$ percent of the decline in the high-frequency volatilities and partially accounts for the redistribution of the variance toward lower frequencies.
In the third essay, I study exchange rate dynamics. In particular, I investigate the main features of a rich theoretical model that are necessary to explain exchange rate volatility and persistence. As a theoretical framework, I use a small open economy dynamic stochastic general equilibrium (DSGE hereafter) model. The model is estimated using Bayesian techniques. I use post Bretton-Woods data for the following three countries: Australia, Canada, and the United Kingdom (UK hereafter). The performance of the benchmark model in replicating both real exchange rate persistence and volatility is rather good. I show that the domestic and importing sector price stickiness and indexation parameters are the most important features of the model for a successful replication of the real exchange rate dynamics. The importance of the importing sector price stickiness and indexation parameters is increasing in the share of importing goods in the consumption basket. The most important shocks for explaining the exchange rate volatility at business cycle frequency are the investment specific technology shock, monetary policy shock, and labor supply shock, among domestic economy shocks, and the shock to the interest rate among the foreign shocks.
Item Open Access Essays in International Business Cycles(2011) Sakane, MichiruThis dissertation consists of two chapters on international business cycles. In the first chapter, I revisit the problem of the anomaly of terms of trade dynamics. First, I empirically analyze the effect of a US aggregate labor productivity shock on the US terms of trade using a Vector Autoregression (VAR) and Maximum Forecast Error Variance identification. I find that the shock appreciates the terms of trade of the US. Next, using a non-homothetic preference, I explain the dynamics of the terms of trade in response to a positive aggregate productivity shock theoretically. Using a model with endogenous markup and heterogeneous firm-specific productivities, the appreciation of the terms of trade can be generated even under a complete asset market assumption. Unlike previous studies, I explain the dynamics of the terms of trade through a new channel, which is the channel of relative cutoff firm-specific productivity that determines the optimal export decisions of the firms. Depending on the asset market structure, two competing effects, i.e., the income effect and the markup effect, have different implication to terms of trade dynamics. Under the assumption of financial autarky, the income effect is bigger than the markup effect and the terms of trade depreciates in response to a positive aggregate productivity shock. However, if we allow for the trade of state-contingent or non-state contingent bonds, the markup effect also comes into play and the terms of trade appreciates, which is in line with the empirical findings.
In the second chapter, I study the international transmission effects of the news about the Total Factor Productivity (TFP hereafter) of the US to the Canadian and Japanese economy. First, using the Vector Error Correction Model (VECM), the impulse responses of Canadian and Japanese macroeconomic variables to the US news shock are estimated. Next, I develop and estimate a two-country real business cycle (RBC) model with investment adjustment cost and the preference which eliminates the wealth effect on hours worked to generate booms in Canadian and Japanese variables in response to news about future US TFP. I find that international macroeconomic comovements can be generated by the news about future TFP in the US. Unlike previous studies, I show that the response of Canadian or Japanese TFP to the US news shock is important in order to generate the boom observed in the empirical analysis. Estimated value of the preference parameter indicates that eliminating the wealth effect on hours worked is important. I also show that low elasticity of substitution between domestically and foreign produced intermediate goods can also help explain the domestic boom created by the news shock, which highlights the importance of analyzing an open economy.
Item Open Access Essays in International Finance(2015) Valchev, RosenThis dissertation addresses three key issues in international finance and economics: the uncovered interest rate parity puzzle in exchange rates, the home bias puzzle in portfolio allocations, and the surprising lack of correlation between terms of trade shocks and output in small open economies.
The first chapter shows that the much-studied Uncovered Interest Rate Parity (UIP) puzzle, the observation that exchange rates do not adjust sufficiently to offset interest rate differentials, is more complicated than commonly understood. I show that the puzzle changes nature with the horizon. I confirm existing short-run evidence that high interest rate currencies depreciate less than predicted by the interest rate differential. But, building on Engel (2012), at longer horizons (4 to 7 years) I find a reverse puzzle: high interest rate currencies depreciate too much. Interestingly, the long-horizon excess depreciation leads exchange rates to converge to the UIP benchmark over the long-run. To address the changing nature of the puzzle, I propose a novel model, based on the mechanism of bond convenience yields, that can explain both the short and the long horizon UIP violations. I also provide direct empirical evidence that supports the mechanism.
In chapter 2, I address the puzzling observation that portfolios are concentrated in asset classes which comove strongly with the non-financial income of investors. As an explanation, I propose a framework of endogenously generated information asymmetry, where rational agents optimally choose to focus their limited attention on risk factors that drive both their non-financial income and some of the risky asset payoffs. In turn, the agents concentrate their portfolios in assets driven by those endogenously familiar factors. I explore an uncertainty structure that implies decreasing returns to information, whereas the previous literature has focused on a setup with increasing returns. I show that the two frameworks have differing implications, which I test in the data and find support for decreasing returns to information.
In chapter 3, I address the puzzling lack of correlation between Terms of Trade (ToT) and the Small Open Economy (SOE) GDP. A SOE model typically relies on three sources of exogenous disturbances: world real interest rate, Terms of Trade (ToT) and technology. However, the empirical literature has failed to reach a consensus on the relative importance of the terms of trade as a driver of business cycles, with some papers claiming they are hugely important while others find no evidence of a relationship at all. Kehoe and Ruhl (2008) have recently shown that the weak empirical link between ToT and the GDP might be due to measurement limitations with the output series in an open economy framework. This paper merges data on national accounts with data on global trade flows for a panel of 31 countries and finds that Terms of Trade have a negligible effect on GDP but a strong effect on aggregate consumption. The evidence supports the hypothesis that ToT are important drivers of business cycles, but measurement issues with GDP obscure their relationship with real output. This further suggests that researchers should be careful when equating model output with measured GDP in an open economy setup.
Item Open Access Essays in International Macroeconomics(2011) Tabova, AlexandraThis dissertation consists of two essays in international macroeconomics. In the first essay I explore the role of portfolio diversification in explaining the distribution of foreign investment across countries. I do so by adopting a portfolio allocation approach to risk, that is widely used in empirical finance, to complement more traditional analyses of foreign capital flows across countries. I capture the portfolio diversification motive by a measure of country-specific riskiness, "covariance risk", which I construct as how countries' growth rates covary with the stochastic discount factor of a representative international investor. The idea is to capture the extent to which investments in a foreign economy provide a hedge against the investor's overall risk. My key new empirical finding is a strong and significant correlation between this new measure of country riskiness and foreign investment allocations. Less risky countries, i.e countries whose growth rates are more highly correlated with the investor's stochastic discount factor, receive larger investment shares than more risky countries. I interpret this result as evidence that investors do take into account diversification opportunities not only for portfolio investment decisions but also for foreign direct investment decisions. My empirical results confirm the theoretical predictions of standard portfolio allocation models.
In the second essay I explore the business cycle regularities of low-income countries in comparison to those observed in middle- and high-income countries. The data reveals several distinguishing features of the business cycle in low-income countries compared to the other two income groups: acyclical trade balances; highest volatility of consumption relative to output; highest volatility of debt; highest average debt-to-output ratio and lowest average savings ratio; significant negative correlation between domestic saving rates and the net foreign asset position. My main finding is that a small open economy model with both trend and transitory shocks to productivity, and varying intertemporal elasticity of substitution, motivated by subsistence consumption theories, can be used to account for the distinguishing features of the three income groups. The theoretical model shows that while both permanent shocks and transitory fluctuations around the trend are important sources of fluctuations in low-income countries, temporary shocks play a predominant role. In comparison to the other two income groups the volatility of the temporary shock for the low-income countries is more than three times higher than that for the high-income group and twice as large as that for the middle-income group. The same pattern holds for the permanent shock.
Item Open Access Essays in International Macroeconomics(2007-05-10T16:01:33Z) Liu, XuanThis dissertation consists of two essays in international macroeconomics. The first essay shows that optimal fiscal and monetary policy is time consistent in a standard small open economy. Further, there exist many maturity structures of public debt capable of rendering the optimal policy time consistent. This result is in sharp contrast with that obtained in the context of closed-economy models. In the closed economy, the time consistency of optimal monetary and fiscal policy imposes severe restrictions on public debt in the form of a unique term structure of public debt that governments can leave to their successors at each point in time. The time consistent result is robust: optimal policy is time consistent when both real and nominal bonds have finite horizons. While in a closed economy, governments must have both nominal and real bonds, and have at least real bonds over an infinite horizon to render optimal policy time consistent. The second essay uses a dynamic stochastic general equilibrium model to theoretically rationalize the empirical finding that sudden stops have weaker effects on outputs when the small open economy is more open to trade. First, welfare costs of sudden stops are decreasing in trade openness. The reason is that when the economy is more open to trade, the economy will have less volatile capital, which leads to less volatile output. In terms of welfare, when the small open economy is more open to trade, the welfare costs of sudden stops will be smaller. Second, sudden stops may be welfare improving to the small open economy. This is because when the representative household is a net borrower in the international capital market, its consumption will be negatively correlated with country spread. Since utility is a concave function of consumption, it must be a convex function of country spread. That is, when the country spread is more volatile, the mean utility is higher. The two findings are robust: they hold with one sector economy model, and two sector economy models with homogenous capital and heterogenous capital. In addition, this paper shows that a counter-cyclical tariff rate policy is not welfare-improving.Item Open Access Essays in Macroeconomics(2016) Yu, YangMy dissertation consists of three self-contained essays on macroeconomics. Chapter 2 "Churning, firm inter-connectivity, and labor market fluctuations'' studies the implications of firm inter-connectivity and irreversibility of inter-firm cooperation relationships on the business cycle. Chapter 3 "Inter-sector matching efficiency and sectoral comovement'' examines the comovement of sectoral labor markets when there is search friction in the inter-firm matching market. Chapter 4 "Lumpy investment and endogenous investment price'' (Joint work with Linxi Chen) studies the endogenous fluctuation of investment price induced by search friction in the investment goods market and partial irreversibility of capital adjustment. Each of the essays investigates the implication of market frictions, such as search friction and partial irreversibility, to the business cycle from a different perspective.
Item Open Access Essays in Macroeconomics(2017) Roark, Christopher JamesThis dissertation will address the dynamic interrelationship between multiple macro-economic fundamentals. The second chapter details a solution to the excess volatility puzzle described in the macro-economic labor literature in which properly calibrated search and matching models are unable to accurately match both the volatility of vacancies and productivity. The model described utilizes agents who abstract from rational expectations via knightian uncertainty in order to break the tight mechanism that links both productivity and vacancies together. The third chapter documents previously unknown long and short run dynamic interrelationships between the real exchange rate and various macro-economic fundamentals. It refutes the Backus-Smith model's assertion that relative consumption growth and the real exchange rate should be tightly correlated and documents a novel relationship between relative investment and output growth. More specifically, it notes that higher relative investment today should signal future appreciations of the exchange rate. The fourth chapter takes the novel result from the third chapter and proposes a model in order to define a mechanism which may explain the interesting interrelationship between investment and the real exchange rate at medium and long horizons. In particular, the model utilizes bonds as a form of collateral in the production of the investment good in order to more tightly link the two fundamentals.
Item Open Access Essays in Macroeconomics(2018) Bergeron, AdamThis paper consists of three essays, with a focus on household behavior and decision making. In the first essay, I consider a two asset lifecycle model with transaction costs and show that allowing individuals to learn about their idiosyncratic skill (and therefore their future income distribution) over time yields starkly different asset allocation and overall savings decisions by households as compared to a more restricted income process typically considered in the literature. Using parameters estimated from the same underlying income data as the standard process, I show that a model with learning generates more liquid saving over the entire lifetime, suppresses illiquid saving early on, and increases illiquid saving later in the lifecycle.
In the second essay, I examine household financial data from the Survey of Consumer Finances. I show that a model with learning is more easily able to generate sufficient liquid assets to match the ratio of average holdings of illiquid to liquid assets over the lifetime found in the data. I further show that a model without learning requires a risk aversion parameter nearly six times that of the learning model to generate the same ratio. Finally, I show that for a select group of individuals, the marginally propensity to consume out of extra income in the learning model is only 56\% of that of the model without learning. This suggests that introducing learning into the household portfolio problem potentially has large policy implications.
In the third essay, I consider a city-level environment in which individuals search simultaneously for both housing and employment. I construct a model in which the unemployment rate, per capita income, population growth, home prices, home construction rates, and rent are all endogenously determined. I then compare the response of the variables from a labor demand shock to their empirical counterparts. The model has some success qualitatively matching impulse responses from the data.
Item Open Access Essays in Macroeconomics and Entrepreneurship(2019) Tan, Jun Jie EugeneThis dissertation is comprised of three chapters in macroeconomics, entrepreneurship, and heterogeneous agent models. In the first chapter, I answer two main questions --- What are the empirical facts regarding entrepreneurial investment choices, and to what extent do the investment choices of entrepreneurs help to explain top wealth inequality. To that end, I document some novel facts about entrepreneurial investment dynamics. I show that these facts are suggestive that capital illiquidity are an important friction with regards to entrepreneurial investment choices. To quantify these frictions, I construct a new general-equilibrium heterogeneous agents model of entrepreneurship that features illiquid investments. I calibrate this model to identifying features of the data, and find a large role for illiquidity. I also find that the investment and savings choices of entrepreneurs help explain a substantial fraction of wealth inequality. Counterfactual analysis shows that the illiquidity friction generates substantial welfare and productivity losses by allocating wealth away from high productivity entrepreneurs to low productivity entrepreneurs, which simultaneously leads to lower wealth inequality. As such, I find that a policy of partial insurance against illiquidity risks can help ameliorate these losses, and simultaneously increases wealth inequality. In my second chapter, I present new evidence regarding the effect of uncertainty shocks on firm startup and exit rates. I document that uncertainty shocks are strongly and negatively correlated with firm startup rates, but essentially uncorrelated with exit rates. I show how my model of illiquid entrepreneurial investments can help explain these facts, and argue that capturing the extensive margin of adjustment to uncertainty shocks is important in amplifying and propagating the effects of uncertainty shocks. Finally, in my last chapter, I present a new computational algorithm to compute distributions in heterogeneous agent models. I show how this algorithm improves on current methods by reducing the amount of computational memory and time required, and provide a simple and intuitive explanation as to how this algorithm improves on the textbook method.
Item Open Access Essays in Macroeconomics and Entrepreneurship(2019) Tan, Jun Jie EugeneThis dissertation is comprised of three chapters in macroeconomics, entrepreneurship, and heterogeneous agent models. In the first chapter, I answer two main questions --- What are the empirical facts regarding entrepreneurial investment choices, and to what extent do the investment choices of entrepreneurs help to explain top wealth inequality. To that end, I document some novel facts about entrepreneurial investment dynamics. I show that these facts are suggestive that capital illiquidity are an important friction with regards to entrepreneurial investment choices. To quantify these frictions, I construct a new general-equilibrium heterogeneous agents model of entrepreneurship that features illiquid investments. I calibrate this model to identifying features of the data, and find a large role for illiquidity. I also find that the investment and savings choices of entrepreneurs help explain a substantial fraction of wealth inequality. Counterfactual analysis shows that the illiquidity friction generates substantial welfare and productivity losses by allocating wealth away from high productivity entrepreneurs to low productivity entrepreneurs, which simultaneously leads to lower wealth inequality. As such, I find that a policy of partial insurance against illiquidity risks can help ameliorate these losses, and simultaneously increases wealth inequality. In my second chapter, I present new evidence regarding the effect of uncertainty shocks on firm startup and exit rates. I document that uncertainty shocks are strongly and negatively correlated with firm startup rates, but essentially uncorrelated with exit rates. I show how my model of illiquid entrepreneurial investments can help explain these facts, and argue that capturing the extensive margin of adjustment to uncertainty shocks is important in amplifying and propagating the effects of uncertainty shocks. Finally, in my last chapter, I present a new computational algorithm to compute distributions in heterogeneous agent models. I show how this algorithm improves on current methods by reducing the amount of computational memory and time required, and provide a simple and intuitive explanation as to how this algorithm improves on the textbook method.
Item Open Access Essays in Quantitative Economics(2020) Liu, ZhaoThis thesis contains essays on quantitative economics. It focuses on understanding capital markets and macroeconomics through general equilibrium models and econometric tools. In the second chapter, I propose a two-sector production-based dynamic stochastic general equilibrium model to study the interaction between R&D activities and firm heterogeneity. I argue that the different business risks faced by R&D and non-R&D firms, could be an important source of heterogeneity in asset prices between R&D and non-R&D firms. In the third chapter, co-authored with Riccardo Colacito and Mariano Massimiliano Croce, we characterize the equilibrium of a complete market economy with multiple agents featuring a preference for the timing of the resolution of uncertainty. We provide conditions under which the solution of the planner's problem exists, and it features a nondegenerate invariant distribution of Pareto weights. In the fourth chapter, I define a first-order good uncertainty measure. I then incorporate it into the DSGE model to evaluate the aggregate effects of both good and bad uncertainty. In the final chapter, I propose a buffered double autoregressive (BDAR) time series model to depict the buffering phenomenon of conditional mean and conditional variance in time series. I first prove strict stationarity and geometric ergodicity of the BDAR model under several sufficient conditions. I then propose a quasi-maximum likelihood estimation procedure and study its nontrivial asymptotic property. Furthermore, a model selection criteria and its asymptotic property have been established. I evaluate the model's performance, using both simulated and real data.
Item Open Access Essays on Exchange Rate Risk(2012) Rafferty, Barry JohnThis dissertation is a collection of papers with the unifying objective being to better understand crash risk in foreign exchange markets. I investigate how exposure to the risk of currency crashes is able to provide a unified rationalization of the returns of various sorted currency portfolios.
In the first chapter, I identify an aggregate global currency skewness risk factor, which I denote SKEW. Currency portfolios that have higher average excess returns covary more positively with this risk factor. They suffer losses in times when high interest rate investment currencies have a greater tendency to depreciate sharply as a group relative to low interest rate funding currencies. Consequently, they earn higher average excess returns as reward for exposure to this risk. I create three sets of sorted currency portfolios reflecting three distinct sources of variation in average excess currency returns. The first set sorts currencies based on interest rate differentials. The second set sorts currencies based on currency momentum. The third set sorts currencies based on currency undervaluedness relative to purchasing power power parity (PPP) implied exchange rates. I find that differences in exposure to the global currency skewness risk factor can explain the systematic variation in average excess currency returns within all three groups of portfolios much better than existing foreign exchange risk factors in the literature.
In the second chapter, I build on the first chapter by studying the extent to which currency crash risk is predictable or unpredictable and whether the pricing power of aggregate currency skewness, uncovered in the first chapter, is due to unpredictable or predictable crash risk. Focusing on currency crash risk proxied using realized currency skewness at both the individual currency level and at the aggregate level using the SKEW risk factor introduced in the first chapter, I investigate whether either form of crash risk is predictable using only past information about crash risk. In particular, I use past information on both individual currency level and aggregate level measures based on both lagged realized currency skewness and lagged option implied risk neutral skewness. I find evidence that there is not much predictability at the individual country level or at the aggregate level over the full sample period considered. However, there is some evidence of predictability at the aggregate level since 1999, and especially so when option implied risk neutral skewness measures are used. Additionally, I use the predictions of SKEW and conduct asset pricing similar to that in chapter 1 using predicted and unpredicted SKEW to see whether its pricing power comes from predictable or unpredictable components. I find evidence that it is unpredictable currency crash risk that is very important, as the asset pricing results are largely identical when either SKEW or SKEW forecast errors are used. and whether the pricing power of
Item Open Access Essays on Macroeconomics and Labor Markets(2018) Botelho, VascoThis dissertation consists of three essays. In the first essay, ``The Structural Shift in the Cyclicality of the U.S. Labor Income Share: Empirical Evidence'', I document a structural shift in the cyclicality of the labor share from countercyclical to procyclical. I conclude that this structural shift is due to a decline in the usage of labor hoarding at the firm level and to an increase in the volatility of real wages. I also provide evidence suggesting this shift is widespread to the entire economy and is not due to structural changes in the industrial composition for the U.S. economy. In the second essay, ``The Cyclicality of the Labor Share: Labor Hoarding, Risk Aversion and Real Wage Rigidities'', I explore whether the decline in the usage of labor hoarding is able to jointly generate the vanishing procyclicality of labor productivity and the shift in the cyclicality of the labor share. I conclude that while these models are able to generate the vanishing procyclicality of labor productivity, they will generate counterfactually a more countercyclical labor share. This counterfactual result also occurs when I consider instead a decline in the workers' bargaining power in the wage bargaining power and an increase in the relative importance of aggregate demand shocks. In the third essay, ``The Public Sector Wage Premium: An Occupational Approach'', I characterize the strategy undertaken by the U.S. government to provide insurance to workers in occupations that are on the left-tail of the private wage distribution. I conclude that the government is effectively offering a high wage premium to non-routine manual workers and a wage penalty to non-routine cognitive workers.
Item Open Access Essays on Macroeconomics in the Frequency Domain(2010) Pancrazi, RobertoThis dissertation consists of three essays on macroeconomics in the frequency domain. In the first essay, I show that whereas the High-Frequency volatility of the majority of the macroeconomic series declined after the early 1980s, their Medium-Frequency volatility did not. Moreover, the Medium-Frequencies capture a large fraction of the volatility of these variables. In order to formally test whether a set of time-series is characterized by a break in their variance at any frequency, I construct a frequency domain structural break test. After deriving its asymptotic and small sample properties, I apply the test to the main U.S. real macroeconomic variables and conclude that the Great Moderation is just a High-Frequency phenomenon.
In the second essay I compute the welfare cost of the Great Moderation, using a consumption based asset pricing model. The Great Moderation is modeled according to the data properties of the stationary component of consumption, which displays a reduction of the volatility at high frequencies, and an unchanged volatility at medium frequencies. The theoretical model, calibrated to match the average asset pricing variables in the data, relies on the evolution of the habit stock, which depends on the lower frequencies of consumption. These two features generate a modest welfare gain of the Great Moderation (0.6 percent). I show that this result depends mainly on the medium frequency properties of consumption.
The third essay, which is joint work with Marija Vukotic, evaluates the effects of a change in monetary policy on the decline of the volatility of real macroeconomic variables, and on its redistribution from high to medium frequencies during the post-1983 period. By using a dynamic stochastic general equilibrium (DSGE hereafter) model, we find that the
monetary policy alone cannot account for the observed changes in the
spectral density of output, investment, and consumption. However, when we also consider a change in the exogenous processes, a different monetary policy accounts for 40 percent of the decline in the high-frequency volatilities and partially accounts for the redistribution of the variance toward lower frequencies.
Item Open Access Financial Intermediation and the Macroeconomy of the United States: Quantitative Assessments(2012) Chiu, Ching WaiThis dissertation presents a quantitative study on the relationship between financial intermediation and the macroeconomy of the United States. It consists of two major chapters, with the first chapter studying adverse shocks to interbank market lending, and with the second chapter studying a theoretical model where aggregate balance sheets of the financial and non-financial sectors play a key role in financial intermediation frictions.
In the first chapter, I empirically investigate a novel macroeconomic shock: the funding liquidity shock. Funding liquidity is defined as the ability of a (financial) institution to raise cash at short notice, with interbank market loans being a very common source of short-term external funding. Using the "TED spread" as a proxy of aggregate funding liquidity for the period from 1971M1 to 2009M9, I first discover that, by using the vector-autoregression approach, an unanticipated adverse TED shock brings significant recessionary effects: industrial production and prices fall, and the unemployment rate rises. The contraction lasts for about twenty months. I also recover the conventional monetary policy shock, the macro impact of which is in line with the results of Christiano et al (1998) and Christiano et al (2005) . I then follow the factor model approach and find that the excess returns of small-firm portfolios are more negatively impacted by an adverse funding liquidity shock. I also present evidence that this shock as a "risk factor" is priced in the cross-section of equity returns. Moreover, a proposed factor model which includes the structural funding liquidity and monetary policy shocks as factors is able to explain the cross-sectional returns of portfolios sorted on size and book-to-market ratio as well as the Fama and French (1993) three-factor model does. Lastly, I present empirical evidence that funding liquidity and market liquidity mutually affect each other.
I start the second chapter by showing that, in U.S. data, the balance sheet health of the financial sector, as measured by its equity capital and debt level, is a leading indicator of the balance sheet health of the nonfinancial sector. This fact, and the apparent role of the financial sector in the recent global financial crisis, motivate a general equilibrium macroeconomic model featuring the balance sheets of both sectors. I estimate and study a model within the "loanable funds" framework of Holmstrom and Tirole (1997), which introduces a double moral hazard problem in the financial intermediation process. I find that financial frictions modeled within this framework give rise to a shock transmission mechanism quantitatively different from the one that arises with the conventional modeling assumption, in New Keynesian business cycle models, of convex investment adjustment costs. Financial equity capital plays an important role in determining the depth and persistence of declines in output and investment due to negative shocks to the economy. Moreover, I find that shocks to the financial intermediation process cause persistent recessions, and that these shocks explain a significant portion of the variation in investment. The estimated model is also able to replicate some aspects of the cross-correlation structure of the balance sheet variables of the two sectors.
Item Open Access Macroprudential Policies and Financial Frictions(2017) Arik, Hasan SadikThis dissertation consists of two essays on macropudential policies and financial frictions. In the first essay, the Reserve Option Mechanism, an unconventional policy tool invented and used by the Central Bank of the Republic of Turkey, is modeled and evaluated. The mechanism is designed to act as an automatic stabilizer of large fluctuations of exchange rate by letting banks use foreign currency to fulfill a portion of the domestic-denominated required reserves. Hence, the fluctuations in domestic business cycles due to volatile short-term capital flows are expected to be mitigated. The mechanism works through easing the frictions faced in the financial sector by generating a certain level of ``confidence" for the banks in terms of having enough foreign funding as reserves. Banks utilize the mechanism up to a point where this benefit is offset by the cost of using the mechanism: the Reserve Option Coefficient, which is the amount of foreign currency that must be held to meet one-unit domestic-denominated reserve requirement, i.e., an artificially imposed ``exchange rate". Two channels through which the mechanism is utilized are identified: a) the funding spread banks face between the foreign and domestic funding rates, and b) depreciation channel which involves the valuation of already-held foreign reserves through the mechanism.
In the second essay, I present a dynamic stochastic general equilibrium model that can be used to evaluate macroprudential policies. In the model, both the financial intermediaries and the non-financial firms face financial frictions and make separate financial decisions. After showing the model's relative ability to replicate events like the Great Recession compared to natural benchmark models, I document that financial shocks were relatively more important than productivity shocks in the period of the Great Recession. Then, I evaluate a countercyclical capital policy that can help mitigate both financial and productivity shocks. The policy involves injection of additional capital to the banks during bad times, which reduces the frictions banks face; as a result, it is welfare-improving.