Theses - Economics

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Analysing the One Certainty that Rules Us All: Trade (and Economic) Policy Uncertainty
Hong, Tacye
My PhD thesis consists of 4 papers that analyse uncertainty, specifically trade policy uncertainty, by examining its best measurement and its impacts on firms’ international and domestic operations. The first paper, “Improving the Trade Policy Uncertainty Index”, studies how best to measure trade policy uncertainty. I show that Baker et al.’s (2016) and Caldara et al.’s (2020) newspaper-based Trade Policy Uncertainty (TPU) indices misclassify and omit a substantial number of articles. I use a new set of search terms to construct an improved TPU index for the U.S. from 1987 to 2023 and provide a detailed mapping between major trade policy events in the U.S. and the new index. The second paper, “The Effects of Trade Policy Uncertainty on Exporters and Multinational Firms”, is a theoretical paper examining the effects of trade policy uncertainty on the entry and exit of exporters and multinational enterprises (MNEs) in foreign markets. In this paper, I use a two-country DSGE model, where export and MNE continuation costs are lower than entry costs, to analyse the macroeconomic effects of a shock to trade policy uncertainty. In the third paper, “Panic at the Costco: Buffer Stock under Uncertainty”, I build a Small Open Economy model where a distributor keeps buffer stock inventories for the household and producers, and inventory is driven by a preference shifter that depends on the available stock à la Görtz et al. (2022). The fourth paper, “The Volatility of Economic Policy Uncertainty”, is joint work with Prof. Paul Kattuman, where we analyze the volatility of uncertainty, measured using Baker et al.’s (2016) newspaper-based Economic Policy Uncertainty index, in a T-GARCH framework. We then examine the spillovers in both the level and volatility of economic policy uncertainty across countries from 1997 to 2023.
Open Access
Essays on Search and Screening Frictions
Mylius, Felix
Frictions form an integral part of the job search. Search and screening costs make the matching process for workers and firms costly, and asymmetric information can significantly contribute to mismatch: workers cannot observe who else applies to a vacancy, whereas firms cannot observe what other jobs their candidates have applied to. Moreover, even upon screening their candidates, firms only get an imperfect signal of the candidate's skill level. I consider some of these frictions in my theoretical frameworks in each chapter of my thesis. The first chapter studies whether workers can benefit from higher application costs. While this might sound counterintuitive since applicants are harmed by paying more, they, in fact, benefit from reduced congestion: if costs are negligible, workers apply excessively, overloading firms with applications. Thus, with higher costs, firms receive fewer applications from uninterested applicants, which allows them to focus their screening efforts on interested candidates. This means that higher costs increase the chance that a worker matches with their preferred firm. When characterising the conditions under which workers benefit from cost increases, I show that not only how many applications are directly withdrawn through a cost increase matters, but also the nature of application strategies, given that those are either strategic substitutes or complements. In the case of strategic complements, cost increases are more impactful. My findings provide a novel perspective on application costs, challenging the conventional view that higher costs would harm applicants. The fact that lower search barriers make workers apply to firms they are less interested in also plays a central role in the second chapter, albeit in a different context. I address the phenomenon that job referrals are still as essential in labour markets as they used to be over the past decades. Since the internet has made searching and applying for jobs much easier, one would expect people to rely less on social contacts to find a job nowadays. To find an answer to this puzzle, I explore a new channel that makes referred candidates stand out among all applicants: a higher likelihood of accepting a job offer. This trait becomes particularly advantageous whenever firms face large uncertainty over whether their candidates would accept their job offer. If search barriers vanish and workers apply to more firms, a referred candidate expects to face more competitors. On the other hand, if workers apply to more firms, they are, on average, less interested in each firm they apply to, which makes referred candidates stand out more. This means the chances of getting a job offer through a referral can increase if search barriers decrease. My third chapter is based on a joint project with Dr Keith Chan from the Hong Kong University of Science and Technology. We study the impact of economic downturns on the skill composition of unemployed workers. Since screening is imperfect, this question is fundamental for firms that are considering posting vacancies. Therefore, numerous papers have studied this topic theoretically and empirically. However, their results contradict each other, meaning there is no consensus on the net impact of shocks. To reconcile this division, we provide a tractable framework to understand (i) what factors drive the skill composition of unemployed workers and (ii) how productivity shocks affect those drivers. To provide a comprehensive analysis, we allow for productivity shock changes in both frequency and severity. We find that changes in either dimension induce effects that have opposite directions, making the net change of the average skill of an unemployed worker ambiguous. Moreover, we characterise the circumstances under which the net impact is positive or negative.
Open Access
Essays on the Economics of Debt, Default and Housing Markets
Hannon, Andrew
This thesis is composed of three chapters on different topics of macro-finance. Thematically, they are linked by their focus on household credit constraints - be they exogenous regulatory constraints, as in Chapter 1, or endogenous constraints as in Chapters 2 and 3. The first chapter is joint work with Juan Castellanos Silvan and Gonzalo Paz-Pardo. We propose a joint model of the aggregate housing and rental markets in which both house prices and rents are determined endogenously. The key part of the model is that households can choose their housing tenure status (renters, homeowners, or landlords) depending on their age, wealth, and income. We show how the reliance on heterogeneous household landlords generates an upward sloping supply curve for rented accommodation. With the model in hand, it can be used to study the introduction in Ireland in 2015 of macroprudential policies that limited loan-to-value (LTV) and loan-to-income (LTI) ratios of newly originated mortgages. The introduction of stringent LTV and LTI ratios mitigates house price growth, but increases rents and reduces homeownership rates. As a result, middle-income households are negatively affected. The second chapter stays with the theme of housing markets but introduces endogenous default. The main innovation is to consider delinquency as an important stage of default. In some European countries, mortgage delinquency rates are much higher than foreclosure rates. The stock of delinquent mortgages peaked at 9\% of GDP in the Eurozone periphery and the average length of a delinquency spell was over 10 months. This fact has been largely neglected in the macro-finance literature. This chapter provides a framework for understanding why high levels of persistent mortgage delinquency can emerge as an equilibrium outcome during a housing market crisis. Banks tolerate delinquency because the gain to foreclosing is less than the option value of continuing with the delinquent loan. By nesting a straightforward game between debt-distressed households and banks within a quantitative macro-housing model, the option to enter delinquency is shown to significantly attenuate (by roughtly half) the consumption drop during a crisis. Importantly, I show that the ability of households to gain insurance through delinquency is significantly impacted by the degree of recourse available to banks upon foreclosure. The model features realistic lifecycle dynamics, tenure choice between renting and owning, endogenous liquidity in the housing market and defaultable, long-term debt. The third and final chapter leaves housing markets behind but sticks with the theme of default, credit risk, and interest rates. Using the Brazilian administrative credit registry data with the universe of all consumer loans originated by banks in the country from 2013 to 2019, the chapter documents high borrowing interest rates, which vary systematically with individual characteristics. In particular, even after controlling for several observable individual attributes - such as income, debt, occupation, and default probabilities, low-income individuals pay higher interest rates than high-income borrowers. We quantitatively analyze a consumer credit market with these characteristics observed in Brazil in a model with endogenous default, and where consumers face idiosyncratic income and expenditure shocks. We perform counterfactual analyses to assess the impact of different financial reforms on borrowing rates, consumption inequality, consumption insurance, and welfare. We find that reforms aiming to reduce intermediation costs and bank market power have sizeable average and distributional welfare implications.
Open Access
Essays on the Transmission of Monetary and Macroprudential Policies
Patozi, Alba
Financial markets both influence and contain important information on the transmission of a range of macroeconomic policies. This dissertation explores the link between financial markets and the transmission of monetary and macroprudential policies. The first chapter, co-authored with Kristina Bluwstein, evaluates the effect of macroprudential policy announcements on systemic risk. We construct a new dataset of macroprudential policy announcements for the United Kingdom and estimate their effect on systemic risk, using a high-frequency identification approach. First, by examining a sample of the largest UK-listed banks, we identify macroprudential policy announcement shocks that were unanticipated by the financial markets. Second, we study the effects of market-based macroprudential policy surprises in a local projection. We find that a perceived macroprudential policy tightening contributes to a substantial reduction in systemic risk in the short run, with effects persisting for several months. The reduction is mostly attributed to the reaction in equity and bond markets. The second chapter estimates the sensitivity of green firms to monetary policy. I document an upward trend in environmental performance among publicly listed companies over the last decade. I then evaluate the implications of firms becoming ‘greener’ for the transmission of monetary policy on asset prices, credit risk and firm-level investment. I show that green firms, with high environmental scores, are considerably less affected by monetary policy shocks compared to their brown counterparts, with low environmental scores. Moreover, I find that dependence of monetary policy responses on firm-level greenness is not due to intrinsic differences in firms’ characteristics or differences in firms’ social and governance performance, but can be attributed to investors’ preferences for sustainable investing. The third chapter examines the impact of preferences for sustainable investing on the transmission of monetary policy. I consider a stylized theoretical framework where investors derive additional utility from their holdings of green assets and demonstrate two key findings. Firstly, investors’ preferences for sustainable investing dampen the semi-elasticity of green asset prices to monetary policy shocks. Secondly, contractionary monetary policy shocks result in a tilt of investors’ portfolios towards green assets. Empirical evidence supports both predictions. Specifically, I find that green firms held by index funds with ESG mandates exhibit a lower sensitivity to monetary policy shocks compared to brown firms. Additionally, I find that the share of green assets in the portfolios of institutional investors does indeed rise in response to higher interest rates. Moreover, by analysing mutual fund flow data, I uncover evidence of an "active" portfolio rebalancing channel among institutional investors.
Embargo
Essays in Macroeconomics and Finance
Xu, Yiming
This thesis contains four chapters, which are at the intersection of macroeconomics and finance, specifically, the implications of leasing for capital and finance allocation efficiency. I focus on operating leases, which account for a significant proportion of the overall productive physical assets used by US firms (from the asset side), and are important external financing sources for firms (from the liability side). However, they were treated as off-balance-sheet items before the 2019 lease accounting rule changes in ASC 842 – hence they are important sources of “unmeasured” asset and liability. The first chapter argues that leasing is an important mechanism for mitigating credit constraint-induced capital misallocation, yet this channel has been widely overlooked in the current macro-finance literature. This chapter demonstrates and quantifies this novel channel through a dynamic general equilibrium model, which features heterogeneous firms, collateral constraints, and an explicit buy versus lease decision. Furthermore, it provides guidance on the empirical measurement of capital misallocation: ignoring leased capital and the mitigation effect can result in significant overestimations of the level and cyclicality of measured capital misallocation. Strong empirical evidence is documented to support the model implications. The second chapter studies leasing’s distinctive role in enhancing total factor productivity (TFP) through facilitating entry and technology adoption. As a form of more collateralizable financing, leasing provides financing for physical capital required in a more productive sector, and raises the expected payoff of entering this sector. This chapter analytically characterizes this extensive-margin role of leasing in terms of efficiency gains. Quantitatively, it shows that approximately 5% of TFP gains can be achieved from leasing along this channel. The next chapter disentangles the sources of capital misallocation in the US when leased capital is explicitly factored in. Using the method of David and Venkateswaran (2019), this chapter obtains new estimates for various sources of lease-adjusted misallocation – including adjustment costs, uncertainty, and firm-specific factors that are correlated with productivity, or permanent to firms. Moreover, this chapter finds that the reduction in overall measured misallocation when adjusting for lease is largely explained by the effect of lease-adjustment through the latter two firm-specific factors. Instead of studying the “true" production side, the final chapter focuses on firms’ liability (financing) side and examines the allocation efficiency of finance. A large overestimation of measured finance misallocation (Whited and Zhao, 2021) is documented when lease-induced debt is ignored among US manufacturing firms. Appropriately adjusting for lease-induced debt leads to a large inefficiency reduction in real value-added. Leasing improves the allocation of finance by raising the total amount of finance as well as by alleviating inefficient debt-equity combinations across firms. Finally, this chapter finds that factoring in lease-induced debt lowers both the level and dispersion of finance costs, consistent with the mitigation effect of lease-adjustment on finance allocation efficiency.
Open Access
Trade Shocks and Trade Policy: Firm Export Behaviour and Competition in International Markets
Prayer, Thomas
This dissertation explores the effects of international trade policy cooperation on firm export behaviour and competition in international markets. It is motivated by three facts. First, firms are increasingly exposed to international trade. World trade has grown by an average of 5% over the last 30 years, and the world trade to GDP ratio has increased by more than a third over this period to around 52% in 2020. Second, firms are subject to a large and growing number of trade policy interventions. The number of trade agreements notified to the WTO, for example, has increased more than tenfold over the past 30 years, to well over 300. And third, international trade agreements do more than just influence the behaviour of the firms they benefit. They shape the competitive environment of the markets they affect. The first chapter argues that mutual recognition agreements have both direct and indirect effects on firms’ export behaviour. These agreements make it easier for international firms to demonstrate that their products meet the minimum requirements of a market, and so streamline market access. I build a multi-country model of trade with oligopolistic competition and variable markups that explicitly models the conformity assessment sector and allows firm decisions to be non-separable across markets. The model highlights three separate direct effects of mutual recognition agreements on firms, an effect on firms’ fixed costs, an effect on firms’ marginal costs, and an effect on the price of conformity assessment, and shows that each of these direct effects also has an indirect effect on the intensity of competition in final goods markets. I simulate my model with standard parameters from the literature and show that mutual recognition agreements benefit firms which are affected by their direct effects, but hurt firms which are exposed only to their indirect effects. I also show that both of these effects are particularly relevant for the most productive firms, and that the effects of mutual recognition agreements without rules of origin are essentially the same for firms based in signatory countries and third-country firms. The second chapter estimates the effects of mutual recognition agreements on disaggregated firm exports. I build on the model presented in the first chapter and develop a new empirical approach which focuses on the experience of third-country firms to circumvent reverse causality concerns and distinguish between the direct and indirect effects of mutual recognition agreements. I then compile a new dataset on the product coverage and implementation timeline of thirteen mutual recognition agreements and combine it with the universe of firm exports for thirteen emerging and developing economies. My results show that firms which benefit from cost reductions as a result of a mutual recognition agreement export around 15% more, while firms which are primarily exposed to the agreement’s broader effects on a market’s competitive environment export up to 15% less. Both the direct and indirect effects of mutual recognition agreements also matter for firms’ extensive margin decisions, export volumes, export prices, the frequency and variety of firm exports, and firms’ import behaviour, as well as for their export performance in unaffected markets. The third chapter explores firms’ markup decisions in international markets and highlights the implications of differences in the intensity of competition between different sets of firms. This chapter is joint work with Meredith Crowley and Lu Han and develops a new multi-country model of trade with variable markups in which firms from the same origin compete more fiercely with each other than with firms from other origins. This gives rise to a rich oligopolistic structure in which an exporter’s markup adjustment after a trade policy shock depends on two market share reallocation effects: (1) an *across-origin* reallocation effect which captures changes in overall competitive pressures for all firms from a given origin in the destination market and (2) a *within-origin* reallocation effect which captures changes in the competitive pressure an exporter faces from its compatriot firms from the same origin. To explore the implications of this model empirically, we combine data on trade agreements and tariffs with detailed administrative customs datasets for eleven emerging and developing economies. We find that the two reallocation effects move in opposite directions after a bilateral tariff liberalisation: while firms face less competition from other origins and the preferred origin as a whole gains market share, each exporting firm faces more competitive pressure from its compatriots due to additional entry and loses market share within-origin. Overall, our results suggest that the within-origin reallocation effect dominates and exporters *reduce* their markups in response to a bilateral trade liberalisation.
Open Access
Essays in Modern Macroeconomics
Wales, Daniel
This PhD thesis consists of a short introduction followed by three papers. Each paper examines a different topic within the broad area of modern monetary and international macroeconomics. The first paper, Product Quality, Measured Inflation and Monetary Policy, written in collaboration with Alex Rodnyansky and Alejandro van der Ghote, fills a gap in the New Keynesian literature, which has largely ignored product quality adjustments. This paper proposes a tractable model of a New Keynesian (NK) economy where, in addition to the standard price and quantity channels, firms are able to endogenously adjust the quality of their products in response to shocks. This new model, featuring endogenous product quality changes subject to adjustment costs, nests the canonical New Keynesian model, which is frequently used as the starting point for policy analysis by central banks. In this framework, endogenous product quality choices imply a larger slope than the traditional NK Phillips curve as, for a positive productivity shock that lowers marginal costs, quality-adjusted prices decline because firms are simultaneously able to increase the quality of their products. Allowing firms to adjust product quality also amplifies the economy’s response to productivity shocks. Following a positive productivity shock the natural real interest rate decreases by more as households look to smooth a larger increase in consumption, which is boosted by a rise in both the quantity and quality of the goods they consume. As a result, monetary policy responds by altering the nominal interest rate by more for a given productivity shock. Model misspecification of imperfectly observable quality adjustments matters more for macroeconomic stabilization than the mismeasurement of those adjustments. With no misperception of product quality by the monetary authority, the principles for optimal monetary policy are, nonetheless, unchanged as the product quality extensions to the canonical NK model preserve divine coincidence. My second PhD paper, The Impact of Large-Scale Asset Purchases on Wealth Inequality examines the relationship between monetary policy and household wealth inequality through changes in the size and composition of the central bank’s balance sheet. I focus on the impact on household wealth inequality through the financial portfolio rebalancing channel of monetary policy transmission. I construct a theoretical model that has multiple assets (of differing liquidity), banks and heterogeneous agents, who experience idiosyncratic labor productivity shocks. This model is carefully calibrated to reproduce theoretical levels of wealth inequality which match those observed in the US Survey of Consumer Finances. I use the model to replicate the changes in the Federal Reserve’s balance sheet which arose in the aftermath of the 2007/2008 financial crisis. This shows that an expansion of the central bank’s balance sheet can materially alter the distribution of wealth, causing inequality to increase, while even extreme changes in the composition of the central bank’s balance sheet (for example through maturity extension) have little effect. This arises as central bank purchases of longer term assets cause households to hold additional liquid financial wealth. Liquid financial assets are unevenly distributed in the population, and hence wealth inequality measures increase. When the model is calibrated to match the Federal Reserve’s Large Scale Asset Purchases (LSAPs) from 2008 until 2014, wealth inequality increases by 3.8%, as measured by the Gini coefficient, suggesting this channel leads to a significant increase in wealth inequality. The final PhD paper, The Rise of Harrod-Balassa-Samuelson, begins by documenting two stylised facts. Firstly, over the past 70 years the positive cross-country relationship between aggregate consumer prices and real output per capita has strengthened (i.e. a rise in the Harrod-Balassa-Samuelson effect), as demonstrated using data from the Penn World Tables. Secondly, border frictions have increased over the same time frame, with international borders effectively becoming wider and an increasing failure of the Law of One Price (LOOP). I construct my own dataset of city-level relative prices using national sources across five continents to document the increasing failure of the LOOP. I then use a two-country endowment model with a domestic distribution services sector to construct an equilibrium failure of the LOOP. An increase in the relative size of the distribution services sector can simultaneously explain both stylized facts, while the standard explanation (a higher share of non-traded goods) may only explain the first. Furthermore, I extend the model to include production by monopolistically competitive firms, before solving and calibrating the model to closely replicate the two stylised facts.
Open Access
Expectations in Financial Markets
Kalsi, Harkeerit
Uncertainty pervades financial markets. How financial market participants form expectations when faced with uncertainty is therefore central to the study of financial markets. This thesis contains three chapters each highlighting the role of expectations formation in determining outcomes in financial markets. The first chapter, coauthored with Nicholas Vause and Nora Wegner, builds a theoretical model of self-fulfilling fire sales motivated by the dash for cash of March 2020. Investment funds fear being hit by a future liquidity shock and can choose to preemptively liquidate their bond holdings. However, funds face uncertainty about how many other funds will choose to preemptively liquidate. If funds wait to see if the liquidity shock crystalises, they risk selling their bonds into a depressed market if other funds have already chosen to liquidate. This creates the risk of a self-fulfilling fire sale where funds choose to preemptively liquidate because they expect that other funds will liquidate. Following the global games literature (Carlsson & van Damme 1993, Morris & Shin 1998), we derive the probability of a self-fulfilling fire sale and extend the model to include a central bank providing a market backstop. The central bank can choose the quantity of assets it is willing to purchase and the discount (relative to the bond return) that it charges to purchase the bond. When we introduce the central bank, we show that if the central bank can credibly commit to (i) set its discount low enough and (ii) the quantity of asset purchases high enough, then it can eliminate self-fulfilling fire sales. Moreover, it can achieve this without having to purchase any bonds. The aggressive policy works via expectations. In particular, it makes the pessimistic beliefs that drive the fire sale impossible for funds to rationalise because the funds know that the central bank stands ready to provide liquidity via asset purchases if needed. Whereas in the first chapter I assume agents can costlessly absorb all available information, in the second chapter (solo-authored), I follow the rational inattention literature (Sims 2003) and relax the assumption that information is costlessly obtained. This enables me to examine whether fragilities can build up in the financial system simply because agents pay insufficient attention to each other. I build a model where bank values are interdependent within a finan- cial network. However, banks cannot costlessly observe other banks’ values. Instead, banks must choose to pay attention to developments in the value of other banks. Because paying attention incurs a cost, banks may optimally choose not to allocate significant attention to certain banks. In the model, banks that believe they have a higher value choose to supply more credit. Therefore, if inattentiveness causes banks to incorrectly infer their own value, their credit supply decisions will be distorted relative to the optimal. I show that banks that are moderately important for determining values in the network cause the greatest distortion in credit supply because banks do not deem them important enough to pay high levels of attention to, yet they are still important for determining bank values. This suggests that we should be more cautious about dismissing all but the most interconnected banks as being important for ensuring financial stability. Thus far, agents have known the objective probability distributions relevant for decision making. In the third chapter, coauthored with Harjoat Bhamra and Raman Uppal, we follow Knight (1921) and distinguish between risk (known probabilities) and Knightian uncertainty (unknown probabilities). We argue that geopolitical uncertainty can often be viewed as Knightian uncertainty rather than risk and our objective is to examine the effects of this uncertainty. We do this by constructing a dynamic stochastic equilibrium production model of a world economy with two countries. Each country is characterised by a traded and a non-traded goods sector and a representative investor with Stochastic Differential Utility who is averse to Knightian uncertainty. We model geopolitical uncertainty as a loss of confidence in the correct model for the shocks to the efficiency units of capital where the investors cannot assign probabilities to the alternative models for the shocks. We solve this model in closed form and show how uncertainty operates by reducing households’ perceived expected returns on capital which, in turn, distorts portfolio and consumption choice decisions. We then examine the implications of these distortions for trade flows, exchange rates, growth, and the level of social welfare. We show that our model can match stylised facts of the UK economy following the Brexit referendum.
Open Access
Essays in volatility modelling
Ding, Yashuang
This thesis mainly concerns some novel developments in volatility modelling. We first derive the diffusion limits of two recently proposed (discrete time) volatility models. Subsequently, we propose a new model that allows for conditional heteroskedasticity in the volatility of asset returns and incorporates current return information into the volatility nowcast and forecast. Our model can capture most stylised facts of asset returns even with Gaussian innovations and is simple to implement. Moreover, we show that our model converges weakly to the GARCH-type diffusion as the length of the discrete time intervals between observations goes to zero. Finally, we generalise our model and propose a new class of volatility models in which we can directly model the time-varying volatility of volatility. We also derive some statistical properties regarding this class of models. Empirical evidence shows that this class of models has better fits as well as more accurate volatility and VaR forecasts than other common GARCH-type models.
Open Access
Essays in Monetary Economics and International Finance
Ostry, Daniel
The rapid rise of U.S. interest rates over the past year has important implications for firms' borrowing costs and investment decisions, for global financial stability and the U.S. dollar exchange rate, and for investors' pricing of the U.S. safety premium across asset classes. These three themes are, respectively, the subject of the three chapters of this thesis. They are bound together by a focus on the role of (U.S.) monetary policy for financial intermediation and asset pricing. Chapter 1, Firm Financial Conditions and the Transmission of Monetary Policy, is co-authored with Thiago Ferreira and John Rogers. We investigate how a firm's investment response to monetary policy depends on its financial conditions, finding a major role for its excess bond premium (EBP)--the component of its credit spread in excess of default risk. Strikingly, while monetary policy easings compress credit spreads more for firms with higher EBPs--i.e. for firms faced with tighter financial conditions--it is lower-EBP firms that invest more. We rationalize these findings with a model in which lower-EBP firms have flatter marginal benefit curves for capital, reflecting their more-resilient investment prospects. Consistent with our model, we show that the pass-through of monetary policy to aggregate investment depends on the distribution of firm EBPs, which varies over time. Chapters 2 and 3 study different aspects of the relationship between monetary policy and the U.S. dollar's safe-haven status. In Chapter 2, entitled Tails of Foreign Exchange at Risk (FEaR), I investigate this relationship during periods of severe stress in global financial markets (disasters). I first develop a model in which the unwinding of carry trades by speculators and a flight-to-liquidity by hedgers jointly determine exchange rate dynamics in disasters. Reflecting these two forces, the dollar experiences an amplified appreciation against high-interest-rate currencies in disasters, and a dampened depreciation, or even an appreciation, against low-interest-rate ones. I then test these predictions by assessing the relative importance of interest differentials and Treasury liquidity premia for explaining the tails of both the exchange rate distribution and the distribution of speculators' and hedgers' portfolio positions. Overall, my analysis quantifies the extent of, and substantiates a mechanism for, the dollar's safe-haven status in disasters. In Chapter 3, U.S. Risk and Treasury Convenience, which is co-authored with Giancarlo Corsetti, Simon Lloyd and Emile Marin, we investigate whether U.S. monetary policy has eroded the U.S.'s safety premium over time and across asset classes. We first document that, over the past two decades, investors in equity markets revised-up their assessment of U.S. risk relative to other advanced economies, driven by perceptions of greater long-run risk. Analytically, we use a no-arbitrage framework to link U.S. relative long-run risk, which we infer from bond and equity premia, to long-run exchange-rate risk and the convenience (liquidity) premium on long-maturity U.S. Treasuries. Taking theory to the data, we find that an increase in U.S. long-run risk leads to a persistent fall in the long-run convenience of U.S. Treasuries, in line with a (perceived) worsening of U.S. fundamentals. Further, we show that expansionary (unconventional) U.S. monetary policy induces both an increase in U.S. long-run risk and a decrease in the Treasury premium. Overall, our results suggest that the rise and fall, respectively, of U.S. long-run risk and long-maturity Treasury convenience yields over the past 20 years may be two sides of the same coin and may be the consequence of easy U.S. monetary policy.
Open Access
Essays on Production Structure and Economic Integration
Smitkova, Lidia
In this dissertation, I present three chapters that study the linkages between the structural makeup of economies and the process of trade- and financial liberalization. In the first chapter I examine the role of trade and external deficits in explaining the patterns of structural change in twenty developed and developing economies between 1965 and 2000. First, for each country, I break down the time series of manufacturing value added share into a secular trend and a trade-induced deviation from the trend. I show that national differences are in large part due to trade. Second, I investigate changes in sectoral productivity, trade costs and trade deficits as the driving forces behind the patterns in the data. To do this I build a multi-sector Eaton and Kortum (2002) model and simulate the effects of different shocks on the manufacturing value added shares in the sample. While calibrating the model, I develop a novel method of identifying trade cost- and productivity shocks, which makes use of symmetry restrictions on sectoral trade cost shocks. I calibrate the model at a two-digit level of disaggregation, which permits me to study not only the changes in the manufacturing share, but also its composition at a sub-sectoral level. I find that open economy forces are responsible for 32% of the observed change in the manufacturing shares in my sample, and for 39% if the composition of the manufacturing sector is taken into account. Focusing on individual shocks, I show that for the aggregate manufacturing share, trade cost- and aggregate trade deficit shocks played the biggest role, whereas the productivity shocks mattered more in driving the composition of manufacturing. In the second chapter, I study financial liberalization between economies that differ in their overall competitiveness. I first show that if firms compete oligopolistically, then competitiveness --- relatively low aggregate unit costs of production --- is a feature of an economy with a fatter tailed productivity distribution and relatively more very large --- `superstar’ --- firms. Embedding this setup in a two-country model with heterogeneous agents and non-homothetic saving behaviour, I show that if the home is more competitive, then: (1) it enjoys a higher aggregate profit rate than foreign; (2) its autarkic interest rate is lower than that in foreign; (3) should the two economies undergo financial liberalization, the capital will be flowing from home to foreign; (4) if one of the sectors is non-tradable, the capital inflows push up the wages in foreign, leading to further losses of competitiveness and to current account overshooting. In the third chapter, I calibrate the quantitative version of the model developed in Chapter 2 to eight European economies on the eve of the Global Financial Crisis. I show that the competitiveness gap can explain 27% of variation in the current account imbalances incurred in the period. I conclude by discussing policies for rebalancing.
Open Access
Essays on the behaviour of political and financial markets
Auld, Thomas
This thesis considers the behaviour and relationships between financial and prediction markets around elections. We begin by reviewing the literature. There are many small studies of individual elections and events, particularly of the 2016 UK European Union referendum. However, no studies that consider multiple events, nor present theories that apply in a general setting, are found. We believe this is a gap in the literature. Chapter 1 begins with a study of the Brexit referendum. Using a flexible prior and Bayesian updating, we demonstrate a major violation of semi-strong market efficiency in both the betting and currency markets on the night following the vote. It appears that it took a full three hours for prices to reflect the information contained in the publicly available results of the referendum. Chapter 2 presents a model linking the prices of financial and binary options in the prediction markets in the overnight session following an election. Starting from basic assumptions we find that prices in both markets should be cointegrated. Under risk neutrality the relationship is linear. However, departures from this assumption result in a non-linear cointegrating relationship. We test the theory on three recent elections. Strong support for the theory is found for two events. The linear cointegrating model fits the data from the night of the EU referendum remarkably well. However, departures from risk neutrality are needed to explain the behaviour observed on the night of the 2016 US presidential election. Chapter 3 considers pricing relationships in the weeks and months leading up to an election. Again using economic assumptions, we derive a relationship between asset price returns and changes in the prices of betting market binary options linked to an election result. This model is extended to equities using the ubiquitous Fama–French 5 factor model. The result is a 6 factor characteristic model, where the additional factor is related to political risk. We test the model on six recent elections. Using daily data, strong support is found for the theory for four events and weak evidence for one. The remaining election does not appear to be informative for asset prices. Interesting relationships are also uncovered between firm characteristics and political sensitivity. This is achieved by exploring the political factor loadings of the different equities under study. The main contributions of this thesis are, one, using a flexible Bayesian approach to demonstrate that, without a shadow of a doubt, any `bubble’ in opinion for remain continued well into the night of the EU referendum, and two, presenting pricing models of prediction and financial markets that apply in general settings and have strong support in the data. We also show that on nights after elections, betting markets lead financial markets on the scale of minutes to tens of minutes. This is consistent with, and an extension of, the conclusion of the existing literature that prediction markets have superior forecasting ability. Whether or not this lead–lag relationship occurs at other times prior to political events is an open research question.
Open Access
Essays on Networks and Industrial Organization
Kalbfuss, Joerg
Chapter I: Cohesive Anarchy --- In a conflict, a small force may overcome a larger one if the latter fails to coordinate. To understand how incentives drive such failures, I study Tullock contests between a cohesive faction and a group embedded in a network. The group’s strength equals the sum of its members' efforts, where links measure their pairwise complementarity or interference. I characterize equilibria for general networks, and find only few members are likely to contribute. Furthermore, the prize and a network measure of interconnectedness jointly improve the internalization of spillovers by the group, so its performance varies with the stakes -- escalation induces cohesion. Chapter II: Spectral Oligopolies --- We study how demand interactions incentivize multiproduct oligopolists to reduce their variable production costs. Our starting point is an equivalence between multimarket competition over dependent products and single-market competition over independent bundles from which we derive three insights. First, heterogeneous innovativeness begets a core-fringe separation. While strong innovators dominate clusters of complementary markets through demand-side economies of scope, others retreat towards niches whose isolation attenuates the impact of investments. Second, the translation from innovative advantage into profits is strongest in `contractor' graphs, the antipodes of expanders. These graphs comprise clusters which are densely linked within but scarcely without, yet synergize well both by themselves as well as collectively. Consequently, the parts and the whole make for attractive and relatively independent investment targets. Third, as demand interactions scale up, both the market concentration and consumers' share of the surplus rise under broad conditions, so market-share based indices of concentration tend to suggest losses for consumers when the opposite is the case. We construct a generalized Herfindahl index which overcomes this limitation. Chapter III: Dominant Firms --- Many consumer industries evolve into partial oligopolies where firms with and without market power coexist. I develop a framework of dynamic competition which explains this pattern. Starting from a market with a continuum of firms, companies stochastically adjust their product offerings through the accumulation of thin-tailed innovations. In conjunction with discrete-choice founded demand, disruption becomes possible: if the spread of tastes relative to innovations' volatility falls below a threshold, occasionally a firm separates from the continuum with an outstanding product. As a result, this dominant firm accrues a positive market share and profit margin until a future innovator supplants it. During these cycles of disruptive turnover, the fringe provides a `seedbed': since incumbents emerge as frontrunners of the ongoing race of innovations, their products' qualities increase in the number of candidate firms from which they are drawn. Through this mechanism, the fringe’s measure is a first-order generator of surplus over time even if its output is not.
Open Access
Essays in modern Macroeconomics
Haber, Timo
This thesis contains three chapters, each addressing a highly relevant area of interest in modern macroeconomics. The first chapter tests the presence of state-dependent pricing frictions by analysing the effects of monetary policy during high inflation and after large monetary shocks. The second chapter focuses on the interaction of heterogeneity in firm potential with financial frictions and its effect on macroeconomic outcomes. The final chapter presents a global solution method for heterogeneous agent models that can handle interesting and relevent extensions to the standard setting.
Open Access
Essays in Macroeconomics
Ochs, Adrian
This thesis contributes to the study of identification in macroeconomics. The first two chapters combine machine learning techniques with econometrics to provide new insights into this long-standing question. I use natural language processing techniques in the first chapter to derive a novel monetary policy shock series. Interested researchers can readily extend this idea to other areas where large amounts of technical documents are available, for example, tax policies or financial markets. In the second chapter, we develop a new method to estimate state dependent policy effects. While researchers previously had to decide on the variables that determine the state, their interactions and their functional form, our approach nests these decisions in a data-driven way. We hope that our methodology simplifies the estimation of state dependent policy effects and leads to new findings in this area. The final chapter provides a novel approach to identifying expectation shocks in a fiscal policy VAR and discusses the particular case of constructing counterfactual impulse response functions for expectations. Both can be useful for studying other policy transmission mechanisms. The first chapter uses text analysis methods from the linguistic machine learning literature to construct a new monetary policy shock series. Measures of monetary shocks commonly give rise to the puzzling result that a monetary tightening has an expansionary effect. A possible reason is that agents may believe that monetary shocks contain infor- mation regarding the central bank’s assessment of the economic environment. Under this hypothesis, the estimated response to monetary policy shocks would contain two conflating effects: the actual effect of monetary policy and the reaction of private agents to the newly acquired information. This paper overcomes this problem by extracting a novel series of monetary shocks using text analysis methods on central bank documents. The resulting text-based variables contain the informational content from changes in the policy rate. Thus, they can be used to extract exogenous changes in monetary policy that are orthogonal to any central bank information. Using this information-free measure of monetary policy shocks reveals that a monetary tightening is not expansionary, even when estimated on more recent periods. The second chapter is co-authored with Christian Rörig and proposes a flexible frame- work to identify state dependent effects of macroeconomic policies. In the literature, it is common to either estimate constant policy effects or introduce state dependency in a parametric fashion. The latter, however, demands prior assumptions about the func- tional form. Our new method allows identifying state dependent effects and possible interactions in a data-driven way. Specifically, we estimate heterogeneous policy effects using semi-parametric varying-coefficient models in an otherwise standard VAR structure. While keeping a parametric reduced form for interpretability and efficiency, we estimate the coefficients as functions of modifying macroeconomic variables, using random forests as the underlying non-parametric estimator. Simulation studies show that this method correctly identifies multiple states even for relatively small sample sizes. To further val- idate our method, we apply the semi-parametric framework to a historical data set by Ramey & Zubairy and offer a more granular perspective on the dependence of the fiscal policy efficacy on unemployment and interest rates. Allowing for interactions between un- employment and interest rates, we show that it is indeed unemployment that is important to explain state dependent fiscal policy effects. The final chapter is co-authored with my supervisor Pontus Rendahl. In our paper, we empirically study the role of expectations in the transmission of fiscal policy. We extend an otherwise standard fiscal policy VAR with inflation and output expectations to construct counterfactual IRFs. Counterfactual IRFs allow us to ask how the economy would have responded to a government spending shock holding inflation or output expectations fixed. This exercise reveals that output expectations are the key driver in the transmission of government spending shocks. Output expectations contribute 60%-90% to the effect of government spending shocks on the fiscal multiplier at different impulse response horizons. We also make several methodological contributions. Firstly, we provide a novel way to identify shocks to expectations using lagged expectations as internal instruments. Secondly, we illustrate how to combine external and internal instruments to estimate a VAR’s impact effects with a single reduced form. Finally, we show that constructing counterfactual IRFs with a hypothetical shock series or setting zeros in the structural matrices of a VAR is equivalent.
Open Access
The Early Novels of Konstantin Fedin
(Faculty of Economics, 1969) Armes, Keith
An attempt has been made in this study to examine in depth the early novels of Konstantin Fedin. The novels discussed are Goroda i gody, Brat'ja, Poxiscenie Evropy, and Sanatorij Arktur, so that the period covered is from 1924 to 1940. Attention was paid primarily to Fedin's artistic method in an endeavour to establish the narrative techniques and literary devices characteristic of the author's work. The problem of characterization is also discussed in detail and the personalities of the principal figures are analyzed in the case of each novel. The question of chronology in Fedin's work has attracted considerable interest, and an analysis of the construction of the novels is provided with a view to establishing the time relationships within each novel. in addition, this study attempts to determine the actual period presented in each case, and it is claimed that new conclusions have been reached in this respect.
Open Access
Essays on Social Networks
To, Yu Yang Tony
This thesis consists of three essays on the economics of social networks. It broadly deals with understanding the value of social connections on favour exchange and information exchange. Social networks facilitate trust, learning, and communication, all crucial in the modern online environment. Examining the effects of network structure provides new tools and insights on decision-making and behaviour. Chapter 1 develops a model of repeated favour exchange on social networks where individuals choose between allocating the opportunity to the expert (market action) or a friend (favouritism action). Assuming favouring a friend reduces one’s payoff, favouritism cannot be sustained in a stage game. However, by introducing a grim-trigger strategy where a selective group of individuals favour each other, favouritism can be sustained in an infinitely repeated game. In particular, the maximum clique of the network defines favouritism behaviour that is coalition-proof where no group of individuals have incentives to deviate collectively. While aggregate surplus increases with network connectivity, it decreases with the number of favouritism-practising agents. Additionally, favouritism exacerbates payoff inequality that arises from degree inequality: Favouritism players cooperate to extract a large portion of the aggregate surplus at the expense of market players, creating a negative externality on the economy. Chapter 2 conducts an experiment to study the impact of network structure on opinion formation. At the start, subjects observe a private signal and then make a guess. In subsequent periods, subjects observe their neighbours’ guesses before guessing again. Inspired by empirical research, we consider three canonical networks: Erdös-Rényi, Stochastic Block and Royal Family. We find that a society with ‘influencers’ is more likely to arrive at an incorrect consensus and that one with ‘network homophily’ is more likely to persist with diverse beliefs. These aggregate patterns are consistent with individuals following a DeGroot updating rule. Chapter 3 studies incentives for verifying information in social networks. Agents derive value from sharing correct information and suffer a reputational loss from sharing false information. So agents can undertake costly verification prior to sharing information. We show incentives for verification are increasing in degree. This implies that information quality is increasing in average degree and is higher in more egalitarian networks. We then introduce an external agent whose goal is to maximise views through a choice of news source accuracy. We find that denser networks lead to higher accuracy when information accuracy is either expensive or cheap, and sparse networks lead to more accurate information otherwise.
Controlled Access
Essays on Medium-Term Economic Cycles and Real-Financial Linkages
Chen, Xiaohua
My PhD research studies medium-term economic cycles and real-financial linkages over the medium term under the supervision of Professor Solomos Solomou. The first paper (‘National and International Medium-term Economic Fluctuations since c.1870’) uses wavelet analysis to examine the time-profile of medium-term fluctuations using GDP and GDP per capita for 30 developed and developing countries since c.1870. The second paper (‘Endogenous Growth and the Financial Accelerator over Medium-term Business Cycles’) studies the mechanism of medium-term cycles in real economy and financial sector, with the structure model. The third paper (‘The Effects of Systemic Banking Crises’) is written with Dr. Bruno Rocha (University of Lisbon) and my supervisor Professor Solomos Solomou (University of Cambridge). We examine the medium-term effects of systemic banking crises on macroeconomy using a data set for a panel of 161 countries for the period 1970-2020, using the linear and non-linear local projection methods to estimate the impulse-response function. The last paper is a joint project with Dr. Nelson Sobrinho (International Monetary Fund). We produce an IMF working paper (‘A Framework for Assessing Low-Income Countries’ Capacity to Repay the IMF’). It is empirical research on the topics of real-financial linkages. Preserving low-income countries (LICs)’ ability to service their debt obligations including to the IMF is key for their continued access to concessional financing and development.
Open Access
Essays in Macroeconomics and Climate Change Mitigation
Hasna, Zeina
As carbon emissions reach unprecedented levels and threats of climate change mount, countries all over the world are racing to implement climate change mitigation policies to limit their carbon footprint and minimize climate risk. This dissertation explores the macroeconomic effects of climate change mitigation policies, namely carbon taxes and green energy investments. The first chapter, co-authored with Tiago Cavalcanti and Cezar Santos, evaluates the aggregate and distributional effects of climate change mitigation policies using a multi-sector equilibrium model with intersectoral input–output linkages and worker heterogeneity calibrated to different countries. The introduction of carbon taxes leads to changes in relative prices and inputs reallocation, including labor. For the United States, reaching its original Paris Agreement pledge would imply at most a 0.6% drop in output. This impact is distributed asymmetrically across sectors and individuals. In the US, workers with a comparative advantage in dirty energy sectors who do not reallocate suffer a welfare loss 12 times higher than workers in non-dirty sectors, but constitute less than 1% of the labor force. The second chapter estimates the local multiplier of spending in green energy in the United States. I construct a novel state-level dataset, and isolate the exogenous variation in green energy spending by exploiting the institutional characteristics of the green budget allocation by the Department of Energy (DoE). I find that a \$1 increase in green investment increases state-level output by \$1.1 contemporaneously, and up to $4.2 within two years of implementation. These estimates are large in comparison to the findings of the literature on public infrastructure multiplier, or the multiplier of non-green investments by DoE. The third chapter builds on the second chapter and provides an empirical and a theoretical breakdown of the local green multiplier in the United States to understand why it is large. Empirically, I find that green energy spending has significant effects on state sectoral output, state-level employment, and state-level investment. Quantitatively, I contrast green and nongreen multipliers by specifying an open economy New Keynesian model with public capital, where each US state is an open economy within a fiscal and monetary union. I calibrate the public capital to green and non-green energy using a transaction-level dataset on awards by the Department of Energy. Model-based counterfactual experiments suggest that 86% of the difference between the green and non-green multipliers is explained by the initial stock of public capital in each energy type. As green public capital is further away from the steady-state, the marginal productivity of investment is higher in the short-run, leading to higher multipliers relative to investment in non-green public capital.
Open Access
Essays in Macroeconomics and Firm Dynamics
Vaziri, Maryam
This thesis contains three chapters and employs empirical and structural tools to study determinants of productivity growth and resource misallocation among firms in the economy. The first chapter studies the implications of financing constraints on optimal expansion strategies of multiple-product firms and their consequent effect on aggregate productivity level. In particular, this chapter seeks to understand how firms may prioritise expanding their domestic product scope over exporting when they have limited access to financing. To answer this question, I develop a firm dynamics model in which firms are heterogeneous in terms of their productivity and access to financing. Analytically, I find that a firm with sufficiently high levels of productivity but low access to financing overcomes its financing constraints by expanding in the domestic market with lower productivity goods and then exporting. I verify this result by structurally estimating an international trade model that matches the moments of the US economy in the early 2000s. I estimate that removing financing constraints would increase the aggregate productivity level by 3.1%. The second chapter provides an empirical investigation of the relationship between the enforcement of antitrust law and various macroeconomic outcomes such as productivity growth, firm entry rate, and investment in Research and Development for two cases: the US and Europe. For the US, I proxy antitrust enforcement by the relative share of antitrust budget, and combine it with firm-level and sector-level data. Similarly, for Europe, I use firm-level and sector-level data together with an antitrust index capturing variation of law across countries and over time. Through both exercises, I find that in more concentrated industries stronger antitrust policies are associated with higher productivity growth, higher entry rate but lower investment in Research and Development. This chapter serves as a motivation to the results in chapter 3. The third chapter develops a structural model to study firms’ strategic and anticompetitive actions, and the consequent role of antitrust law as a macroeconomic policy in generating higher productivity growth. In this chapter, I propose a dynamic general equilibrium model with innovation and oligopolistic product market competition. The oligopolistic competition provides firms with market power, which combined with a dynamic setup, implies that firms may find it optimal to eliminate their competitors through strategic decision making. I then structurally estimate the model to match the recent US experience. Through a quantitative exercise, I find that strengthening antitrust policies improves business dynamism on various fronts: (1) firm entry rate increases, (2) productivity growth improves, (3) labour share of GDP becomes higher, (4) while innovation proxied by the relative share of R&D expenditure falls. The model shows that stronger antitrust policies can improve welfare by up to 16% in consumption equivalent terms.