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The first section is a study on the Thai Baht using an advanced regime-identification tool by Hamilton (1989) on the 1998-2005 monthly data, nesting the special case of a monetary model with emphasis on the real interest rate differential. Three scenarios post-crisis for the Thai Baht were identified by the nonlinear detection mechanism where the unobservable states are assumed to follow the Markov chain of events where past history does not matter. The states identified are described as panic, calm, and favourable markets for the currency. Furthermore, using the Markov-switching software developed by Krolzig (1998), it is possible to provide weak evidence that the nominal exchange rate moved to restore equilibrium in the fundamentals but not vice versa. The second section tested the productivity bias for the Thai quarterly data from 1993-2005, using Johansen cointegration method and found no evidence. The final section has the whole of the Thai economy specified and exogenous shocks sent to see the effects on the real exchange rate. In particular, a surge in productivity in the fully-specified economy causes the real exchange rate to appreciate, confirming the evidence for the productivity bias for the Thai Baht.

This thesis studies the behaviour of interest rates in government bonds markets, foreign exchange rates and national savings. There are three main chapters in the thesis. The first chapter consists of a comparative study of government securities and risk. It generates monthly interest rate risk premium data and examines their determinants. The results show that the risk premia are time varying and also vary considerably across sample countries. In particular, countries with better financial development and higher income generally have lower risk premia of government assets. Additionally, the risk premia are significantly affected by macroeconomic circumstances, especially economic growth and the real effective exchange rate.

This thesis contributes to the literature that analyses the term structure of interest rates from a macroeconomic perspective. Chapter 1 studies the transmission of monetary policy shocks to the US macroeconomy and term structure. Based on estimates of a Macro-Affine model, it shows that monetary policy shocks trigger relevant movements in bond premia, which in turn feed back into the macroeconomy. This channel of monetary transmission shows up importantly in the pre-Volcker period, but becomes irrelevant later. This chapter concludes with an analysis of the macroeconomic implications of shocks to expectations about future monetary policy actions. Chapter 2 proposes a regime-switching approach to explain why the U.S. nominal yield curve on average has been steeper since the mid-1980s than during the Great Inflation of the 1970s. It shows that, once the possibility of regime switches in the short-rate process is incorporated into investors' beliefs, the average slope of the yield curve generally will contain a new component called 'level risk'. Level risk estimates were found to be large and negative during the Great Inflation, but became moderate and positive afterwards. These findings are replicated in a Markov-Switching DSGE model, where the monetary policy rule shifts between an active and a passive regime with respect to inflation fluctuations. Chapter 3 develops a DSGE model in which banks use short-term deposits to provide firms with long-term credit. The demand for long-term credit arises because firms borrow in order to finance their capital stock which they only adjust at infrequent intervals. The model shows that maturity transformation in the banking sector in general attenuates the output response to a technological shock. Implications of long-term nominal contracts are also examined in a New Keynesian version of the model. In this case, maturity transformation reduces the real effects of a monetary policy shock.

In this thesis we study three different, but interconnected low-factor market models: LIBOR market model, Markov-functional model, and two-currency Markov-functional model. The LIBOR market model (LMM) is one of the most popular term structure models. However, it suffers from a major drawback, it is high-dimensional. The problem of highdimensionality can be in part solved imposing a separability condition. We will be interested how the separability condition interacts with time-homogeneity, a desirable property of an LMM. We address this question by parametrising two- and three-factor separable and time-homogeneous LMMs and show that they are of practical interest. Markov-functional models (MFMs) are a computationally efficient alternative to the LMMs. We consider two aspects of the MFMs, implementation and specification. First we provide two new algorithms that can be used to implement the one-dimensional MFM under the terminal and the spot measure driven by a general diffusion process. Since the existing literature has been focused exclusively on the Gaussian driving processes our algorithms open the scope for new parameterisations. We then prove that the dynamics of the onedimensional MFM are only affected by the time dependence of the driving process, described by a copula, and not by its marginal distributions. We then shift our focus and show that the one-dimensional MFM under the terminal measure is closely related to the one-factor separable local-volatility LMM. Finally, we move our attention to the models of a two-currency economy. We propose a new three-factor model that we calibrate to the domestic and foreign caplet prices and the foreign exchange call options. To maintain the no-arbitrage condition while calibrating to foreign exchange market we propose a predictor-corrector type step. It is our conjecture that the predictor-corrector step converges, thus the model is well defined.

This thesis takes interest rates as the topic of interest, and studies financial market integration in China. Paper I studies structural determinants and temporal coefficients of interest rates scattered over 6th -20th century China. Detailed findings concern intrinsic loan features (such as maturity and creditor type, among others) and how they affected the interest rate level. Overall, interest rates decreased in the markets under study, with fluctuations corresponding with dynastic cycles, up-and-down. The two interest rate troughs are found around the 9th -11th century of the Song dynasty and the 19th century of the late Qing period. Significant events of political economy (wars and recovery, international relations and trade, etc.) significantly affected interest rates, but mostly through temporary shocks; economic development and its ensuing financial advancement (in institution, innovation, markets, etc.) tended to show qualitative and long-run impact on financial markets and interest rates. Part II estimates financial integration regarding 14th-20th century China. Firstly estimated is pair-wise integration based on time-series data in 18th-20th century China. Before 1840, distance was the major (but not the only) determinant of financial integration. The maximum range of financial integration at the time was up to 1,400 kilometres, which was slightly farther than that of commodity (grain) integration and confirms the macro-region theory of Skinner in that there was little cross-regional market interplay. However, the overall integration performance for the period before 1840 was limited, with large gaps between distance groups regarding both interest divergence and adjustment speed. A national financial market did not seem to emerge until the 19th century, when both local and cross-regional capital markets became more homogeneous (with converging interest rate gaps and synchronising arbitrage speed). However, the final wars (the 2nd anti-Japanese war and the 2nd civil war in China) before the People’s Republic of China (PRC) stopped this integration process. Secondly, overall integration among 23 provincial markets scattered over 57 years in the Ming and Qing period may be explained by three factors: education, population, and the relative position of the local market to all other markets. The spatial autoregressive coefficients were negative, suggesting that a local provincial market was negatively related to all other markets. Education and population represent the influence of innovation and commerce on overall integration respectively. They are positively associated with interest rate gaps, hence negatively connected to integration. However, such negative relationships might denote financial development in local markets, which lowered local interest rates and temporarily enlarged the interest rate gaps. Neither arable land nor warfare involvement was significant in explaining overall financial integration.

Short-term interest rates are key economic variables, yet few people understand how these rates are determined. This confusion extends to the theoretical level. In neoclassical interest-rate theory for instance, the interest rate is determined by the supply of and demand for loanable funds. Contrary to this view, the Post Keynesian approach suggests that the interest rate is determined by central banks as a key policy variable in pursuit of its monetary policy objective/s. This dissertation examines how the current and previous Governors of the South African Reserve Bank deliberately used short-term interest rates to exert an influence on the general level of short-term interest rates. In doing so, they implicitly adopted the Post Keynesian approach. This view is shared by most central bankers today, giving credence to the widespread recognition that short-term interest rates are determined as a policy variable and not by impersonal market forces. / Economics / MCOM (ECONOMICS)

Short-term interest rates are key economic variables, yet few people understand how these rates are determined. This confusion extends to the theoretical level. In neoclassical interest-rate theory for instance, the interest rate is determined by the supply of and demand for loanable funds. Contrary to this view, the Post Keynesian approach suggests that the interest rate is determined by central banks as a key policy variable in pursuit of its monetary policy objective/s. This dissertation examines how the current and previous Governors of the South African Reserve Bank deliberately used short-term interest rates to exert an influence on the general level of short-term interest rates. In doing so, they implicitly adopted the Post Keynesian approach. This view is shared by most central bankers today, giving credence to the widespread recognition that short-term interest rates are determined as a policy variable and not by impersonal market forces. / Economics / MCOM (ECONOMICS)

This PhD thesis contains three main chapters on macro finance, with a focus on the term structure of interest rates and the applications of state-of-the-art Bayesian econometrics. Except for Chapter 1 and Chapter 5, which set out the general introduction and conclusion, each of the chapters can be considered as a standalone piece of work. In Chapter 2, we model and predict the term structure of US interest rates in a data rich environment. We allow the model dimension and parameters to change over time, accounting for model uncertainty and sudden structural changes. The proposed timevarying parameter Nelson-Siegel Dynamic Model Averaging (DMA) predicts yields better than standard benchmarks. DMA performs better since it incorporates more macro-finance information during recessions. The proposed method allows us to estimate plausible realtime term premia, whose countercyclicality weakened during the financial crisis. Chapter 3 investigates global term structure dynamics using a Bayesian hierarchical factor model augmented with macroeconomic fundamentals. More than half of the variation in the bond yields of seven advanced economies is due to global co-movement. Our results suggest that global inflation is the most important factor among global macro fundamentals. Non-fundamental factors are essential in driving global co-movements, and are closely related to sentiment and economic uncertainty. Lastly, we analyze asymmetric spillovers in global bond markets connected to diverging monetary policies. Chapter 4 proposes a no-arbitrage framework of term structure modeling with learning and model uncertainty. The representative agent considers parameter instability, as well as the uncertainty in learning speed and model restrictions. The empirical evidence shows that apart from observational variance, parameter instability is the dominant source of predictive variance when compared with uncertainty in learning speed or model restrictions. When accounting for ambiguity aversion, the out-of-sample predictability of excess returns implied by the learning model can be translated into significant and consistent economic gains over the Expectations Hypothesis benchmark.