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The widely-used "New Keynesian' model assumes that there is no price flexibility, but prices and wages are extremely "sticky'. In such a model, it is also usual to assume some scheme of lagged indexation which increases the stickiness of inflation. Theoretically, however, we have found that indexation not to lagged actual inflation but to lagged expected inflation (rational indexation) turns out to be the best way to carry out indexation. One major implication of applying this as the indexation formula is that the New Keynesian model behaves in a more 'classical' manner, with very little price stickiness, though still stickiness in real wages and in price mark-ups. Also, given the rational indexation scheme, the optimal monetary policy turns out to be price-level targeting, because such a rule would ensure price stability and minimise the distortions to relative prices due to price shocks. However, whether this socially optimal indexation scheme is feasible in practice is determined by a new empirical testing method suggested by Minford, Theodoridis and Meenagh (2007). From this test, we find that all models with a Calvo contracts framework with different indexation schemes are comprehensively rejected, including the case with theoretically optimal indexation, and so is a 'New Classical' model version, with flexible prices and wages and a one quarter information lag. There is no evidence that indexation of any sort existed. However, the New Classical model does not perform worse than the simple Calvo contract model, suggesting that when the model is improved sufficiently to pass this test, price rigidity will not necessarily feature in the specification.

This thesis collects three interrelated pieces of theoretical work, which are connected to each other in the sense of being rooted in an analysis and examination of a specific type of monetary general equilibrium model which is of a cash-in-advance nature. All of the three contributions extend the usual quantity-theoretic cash-in-advance (CIA) constraint to a more general exchange constraint, in that they include the possibility of allowing the representative household to pay for the consumption good using a (self-)produced alternative means-of-exchange, costly credit. The first two pieces extend the cash costly-credit production-based monetary RBC framework to include habit persistence in consumption and adjustment costs to investment. Most of the stochastic dynamic analysis emphasizes the role of a goods-sector productivity structural shock on/t/, so the thesis focuses on telling a story of a "Wicksellian" Banking time economy, in which it is predominantly this shock alone - and its effect on the Wicksellian equilibrium real rate of interest - that is driving both real and nominal variables in the economy. The growth rate of money is assumed to be of deterministic "k-percent" Friedman-type nature, so as to allow a more focused analysis of the endogenous variation in the demand for money. While the first piece discusses how the chosen modeling framework can success fully account for some factually observed measures related to consumption-money velocity, the second piece uses a similar model setup, but instead discusses the conditional behaviour of key real and nominal variables over the business cycle. Money balances, real quantities, real and nominal rates, as well as (expected) inflation rate series move conditionally over a Solow residual-driven business cycle, so as to closely mimick some of the salient features of a stylized monetary business cycle. Noteably, the additional introduction of credit production shocks allow the artificial economy to closely mimick the breakdown of a stable money demand relationship which is such a pertinent feature of the U.S. monetary business cycle in post-1980 data. Finally, the third piece deviates marginally from the first two contributions in that it constitutes a discussion of a labour-only economy. Here, credit production is de-centralized and produced subject to a debt- (or collateral-) requirement. Specifically, the decentralized financial intermediary is assumed to retain an amount of short-term government debt equal in value to credit on it's balances sheet, which it eventually pays out as a dividend to the household, reimbursing the latter for the cost of credit. The money market rate (obtained on a one-period saving deposit) is generally lower than the usual intertemporal risk-free rate, where the difference is always equal to the banking wage bill, which varies endogenously over the business cycle. This model setup and the implied banking wage tax levied on short-term saving deposits can help to explain some of the unconditional as well as conditional behaviour of the low risk-free, the equity premium, and the unconditional shape of the term structure of interest rates.

We investigate the effects of different sets of shocks on different economies in this thesis. First we study 'contractionary' monetary shocks by imposing sign restrictions on the impulse responses of macroeconomic variables for 6 different economies namely Japan, UK and the US as well as Malaysia, Mexico and South Korea. We show that i) the effect of an adverse monetary policy shock on industrial production is ambiguous; ii) there is price puzzle for Japan and UK which we conjecture as an outcome of excessive bank lending and poor regulation but not of passive monetary policy; iii) there is delayed overshooting puzzle for Japan and the exchange rate puzzle for the UK and the US. For the case of developing countries, we find evidence of delayed overshooting of the exchange rate and evidence of price puzzle for Mexico. This thesis also compares the dynamic effect of fiscal policy on macroeconomic variables implied by a substantial class of DSGE models with the empirical results from imposing sign restriction for Italy and the UK. We observe that private consumption and output increase after an 'expansionary' spending shock. This is in a sharp contrast with neoclassical theories such as real business cycle (RBC) model that presumes consumers behave in Ricardian manner. A 'contractionary' fiscal policy, whether it is revenue or an expenditure shock, induce a recessionary impact on the economy. Therefore while we find support for the conventional Keynesian models, RBC and some variants of this model are naive to explain the behavior of private consumption and wages after a fiscal policy shock. Finally in this thesis we attempt to shed new light on the dynamic impacts of government spending and technology shocks on the real exchange rate for the Euro area. The main idea under this identification scheme is to let the data speak about the behaviour of the interested variables. Moreover, this thesis investigates the impacts of fiscal policy and technology shock jointly in contrast to most of the literature which just focuses on one shock only. Our investigation suggest that the real exchange rate appreciates (falls) following an expansionary fiscal shock. It appreciates in response to a positive technology shock as well however after an on impact depreciation (increase) which lasts for 8 quarters.

Paper 1: We investigate the international distribution of external balances using a world economy model featuring country-specific macroeconomic uncertainty. Incomplete international financial markets and a collateral constraint on borrowing both serve to limit risk-sharing opportunities. In this environment, insurance against uncertainty takes the form of physical capital accumulation and intertemporal trade between countries. The cross-country dispersion of net foreign assets is close to its empirical counterpart. Macroeconomic uncertainty accounts for about one third of the international variation of cross-border asset holdings in the model. Approximations suggest that decreases in financial frictions were an important driver of increases in the international dispersion of external balances observed in the data. Paper 2: I investigate the effect of real exchange rate movements on the international distribution of external balances in a model world economy featuring incomplete markets. Intertemporal trade between nations is the only means of insuring against country-specific uncertainty. By changing the return to delaying consumption, fluctuations in the real exchange rate influence the accumulation of foreign assets. In a plausibly calibrated approximation of the model, the proportion of the cross-country dispersion of net foreign assets, the current account and the trade balance that can be attributed to the effect of real exchange rate movements is 23, 35 and 53 percent respectively. Paper 3: The link between exchange rate flexibility, the international balance sheet and economic recoveries is analysed in this paper through the application of OLS and two-stage least squares estimators to a dataset covering 201 recovery episodes occurring between 1971 and 2007. An instrument representing the history of exchange rate regime choice in the years immediately preceding the recovery is used to identify exogenous variation in exchange rate flexibility for the two-stage least squares procedure. Our results suggest that when external foreign currency denominated debt liabilities are relatively large, a pegged regime is associated with significantly faster real GDP growth than a non-pegged arrangement during a recovery. This finding can be rationalised on the basis that when external foreign currency denominated borrowing becomes sufficiently large, the adverse balance sheet effects associated with higher levels of exchange rate flexibility begin to significantly outweigh the beneficial expenditure switching effects.

Macroeconomic models with rational, heterogeneous agents offer the opportunity to study both individual and aggregate economic outcomes, and the interaction between the two. Solving such models is diffcult: the non-trivial problem of solving a maximisation problem in the presence of uncertainty is complicated by the need to determine model-consistent expectations in an economy with a non-degenerate distribution of agents over states. This thesis provides both technical and mathematical tools which aid the economist in working with such models. Chapter 1 provides an introduction to the topic and discusses the literature. Chapter 2 presents software libraries which automate some of the steps, for example calculating expectations from policy functions. The economist can focus on the code which implements the model-specific solution to the optimisation problem. The libraries are shown to solve models far more efficiently than a comparable solution coded in Matlab. Chapter 3 introduces a new algorithm for calculating model-consistent expectations which relies on straightforward mathematics and a guess for the distribution of agents over states. The initial guess, the distribution obtained under constant aggregate conditions, yields good results. Multiple approaches for further improvement in the forecasting function are discussed. All solutions are computed using the libraries from chapter 2, and the algorithm is also implemented as part of those libraries for use in other models. Chapter 4 discusses a model of the labour market with matching and large, heterogeneous forms. The forms experience idiosyncratic demand shocks and adjust their size in response. Steady state solutions are computed for different values of the exogenous tax rate and the transition path demonstrates that, in contrast to the canonical matching model, employment does not adjust instantaneously to changes in market conditions. Chapter 5 discusses some avenues for potential future research.

This thesis comprises three chapters. It focuses on a unique dataset of the full trans- action records of traders in the Chinese futures market. Empirical techniques are used to analyse technical trading behaviour, margin trading, and market reactions to news in this market. Chapter 1, “Technical Trading Behaviour: Evidence from Chinese Futures Market", creates a new computational method to capture technical trading behaviour and finds technical trader's strategies can be classified in to 11 groups in Chinese rebar futures market. We use a simple model with macroeconomic news to filter pure technical traders from the unique data. Based on the estimation of 81000 technical trading rules, we find the potential technical strategies of each trader and we use K-means clustering algorithm to classify them. The coordinates of each cluster summarize the technical trading characteristics of members in each group. High percentage of traders in each group would apply the similar and corres- ponding strategies; Chapter 2, “Margin Trading: Hedonic Returns and Real Losses", focus on margin trading in the Chinese rebar futures market. We find market parti- cipants have a positive chance of a large gain and a large chance of a small limited loss under the mechanism. This kind of hedonic returns looks like that of people who play in a casino or buy lottery tickets. According to the unique dataset, we show that both expected and observed losses are substantial and that the optimal portfolio never contains rebar futures. Based on the analysis of traders' behaviour, we indicate that it is hard to rationalise their trading without a hedonic motive. Their trading behaviour can be easily understood as form of entertainment, such as gambling; Chapter 3, “The Influence of Scheduled Macroeconomic Announcements on the Futures Market: Evidence from Commodity Futures in China", is a com- prehensive empirical analysis of the overall Chinese futures market, which covers 23 commodities futures to observe the relationship between futures and scheduled macroeconomic news. We find the scheduled news affect commodity futures around 20 days before the announcements date and the following adjustment needs several days around the announcement date to be absorbed. Different kinds of commodities futures have different sensitivity levels to the scheduled news and this sensitivity does not depend on the trading activity. We also indicate the influence of scheduled news can happen in any stages of a business cycle. We finally use 36070 traders in the unique data to prove that market participants cannot make excess returns by following macroeconomics news in Chinese futures market.