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This thesis consists of three essays on business cycle fluctuations that are based on the market-clearing dynamic general equilibrium framework. The first two essays examine the ultimate source of economic fluctuations in Thailand and Australia, respectively. The tool of study is the Business Cycle Accounting (BCA) method developed by Chari et al. (2002; 2007a). The third essay investigates the relation between capital-labour substitution and sectoral externalities in self-fulfilling expectation equilibria. It employs a two-sector competitive model proposed by Benhabib and Farmer (1996). The BCA method examines the transmission mechanisms of shocks within an economy. These transmission mechanisms are called wedges which are responsible for the deviation of aggregate variables from a competitive equilibrium. Four categories of wedges are defined in the BCA: 1) the efficiency wedge represents the input-financing frictions in production; 2) the labour wedge is the frictions between consumption leisure trade-off and marginal product of labour; 3) the investment wedge is the frictions between the intertemporal marginal rate of substitution in consumption and the marginal product of capital; and 4) the government consumption wedge indicates the frictions in international borrowing and lending. Chapter 2 applies the BCA method with deterministic wedges to examine the output variations in Thailand between 1971-2003. The efficiency wedge is found to be the most important driving force behind the output variations during episodes of boom and bust in Thailand over the studied period. In particular for the 1997 economic downturn, the evidence shows that the cost of credit intermediation for some firms was relatively high. This altered an acquisition of working capital and labour in these firms when compared to others, which likely caused inefficient reallocation of inputs across the economy. As such, the efficiency wedge appears to fall at aggregate level during the economic downturn. Chapter 3 applies the BCA method with stochastic wedges to examine the variations in output and investment in Australia. Although the efficiency wedge alone can account for these variations, it predicts much more volatility in output than the actual data. Upon allowing for the combination of efficiency and labour wedges, the model can replicate the amplitude of output variations better. The negative cross correlation between these two wedges suggests their interference. Chapter 4 examines the effect of capital-labour substitution on the existence of indeterminacy in two-sector models and check whether the corresponding returns to scale are still empirically plausible. The main finding is that a higher requirement of sectoral externalities for indeterminacy is needed when capital and labour are less substitutable. Intuitively, the low substitutability implies that capital and labour are complementary factors of production. This retards the mobility of factors between the consumption and investment sectors. In the belief driven equilibria, the consumers’ optimistic expectation on returns is fulfilled as long as the rate of returns is sufficiently high such that current consumption is given up for investment. The rate of returns hereby indicates sectoral externalities. In such a production environment, the minimum requirement of externalities for indeterminacy therefore becomes larger so that it can successfully break the tightly coupling factors within sector, and raises the production of investment goods effectively. As a result, the current relative price of investment goods falls. In the next period, consumers enjoy more consumption goods and the relative price of investment good rises. The ascending pricing sequence yields capital gains and the consumers’ belief is finally fulfilled. Based on the logarithmic utility in consumption and the elasticity of substitution of 0.5 as suggested in Klump et al. (2007) and Chirinko (2008), the minimum requirement of returns to scale for indeterminacy is 1.1236, and it still lies within the range in most empirical studies. / Thesis (Ph.D.) -- University of Adelaide, School of Economics, 2009

This paper tests whether politically connected firms in Putin’s Russia are a channel for the political business cycle. Given the widespread corruption and crony capitalism that exists in Russia, it is likely that federal and regional politicians may need to buy the electoral support of powerful, connected firms in order to win elections. Using panel data of approximately 60,000 Russian firms comprising an estimated 62 percent of GDP per year from 2003-2011, I find that federally connected firms are significantly more productive in federal election years. If these cycles in firm productivity are caused by electoral favors from politicians, this not only further corrupts Russia’s political landscape, but it also may induce powerful firms to engage in costly political bidding wars for these connections, thus inhibiting their productivity and the overall productivity of the Russian economy.

EMU as the only functioning single currency area has been criticised as a non-optimal currency area since the Treaty on European Union was signed. Despite this, it has been seen as, probably, the most complete economic project that has ever been conducted by any group of governments. Through Dynamic Factor model and Panel VAR method, we are focusing on the issues of business cycle synchronisation, effectiveness of ECB monetary policy and the euro fiscal dividend, thus to advances the current studies on EMU through assessing whether it can be a sustainable system. For example, whether economic fluctuations can be effectively managed by implementing a single ECB monetary policy and financial market can be relied upon as a monitoring and enforcing device to discipline fiscal behaviour of Eurozone countries. Overall, we concluded that EMU could be more sustainable if it was just formed by its core members, leaving the periphery outside the single currency area. However, since the EU has recently conducted many rescue measures to save the Eurozone, we are unlikely to see those troubled countries to quit EMU, at least, at the present time. The sustainability of the current EMU can be improved if more intra-trade can be promoted to enhance business cycle convergence; hence, it will be more likely to have a union-wide appropriate monetary policy. This will also reduce the requirement of depending upon using fiscal measures to compensate the loss of monetary sovereignty. Moreover, fiscal activities can also be better monitored/enforced since the financial market has begun to adequately adjust the long-term interest rates on Eurozone government bonds according to the development in those countries fiscal stance.

This dissertation studies two interesting business cycle issues. The first issue concerns the effectiveness of tax policies in stimulating an economic recovery. The second issue concerns the costs of business cycle fluctuations to an investor who chooses to invest in risky assets. The first essay evaluates the effectiveness of the "end of double tax" policy in stimulating an economic recovery by analyzing the transitional dynamics of the economy's aggregates toward the steady states. The effectiveness of this policy is compared with two alternative policies that reduce corporate income or personal income taxes. Although all of these tax policies are found to stimulate the economy's levels of output and investment, the "end of double taxation" appears to exert the most significant impact on the aggregate levels of these variables in the short run. Based on this finding, we claim that the "end of double taxation" is an effective policy for stimulating an economic recovery in the short-run. In a thought-provoking exercise Lucas (1987 and 2003) argues that the welfare costs of business cycles is negligible. The second essay follows up on this argument by incorporating prospect theory into the formulation of individual preferences. Prospect theory proposes that agents care about changes in their wealth level rather than the level of their final wealth, and individuals are also taken to be more sensitive to losses than gains in their financial wealth. According to the prospect theory, therefore, the agents take fluctuations in the asset returns seriously. Results from empirical tests find that an individual investor, on average, would give up2.58-9.49% of the average returns, she receives from investing in the risky asset, in order to eliminate all the fluctuations associated with her asset returns. This result is interpreted as an indication of much larger welfare costs than Lucas' estimates.

Thesis advisor: Susanto Basu / Thesis advisor: Fabio Ghironi / Empirical studies highlight that countries that trade intermediate goods exhibit more synchronized business cycles. This positive correlation raises the question of causality. Traditional theoretical mechanisms propose the direction where higher bilateral trade in intermediate goods causes increased business cycle correlations. However, the data shows that trade is positively correlated with comovements in GDP as well as total factor productivity (TFP) and the current work in the literature explains only the first relation. I build a small open economy model that makes two contributions -- first, it predicts both positive correlations as seen in the data. Second, it explains potential causality in the reverse direction, i.e. countries might choose trade partners based on the properties of their business cycles. Specifically, the model predicts that when the elasticity of substitution between domestic capital and intermediate imports is low, i.e. the country is constrained by domestic technology, there is greater benefit from trading with a positively correlated source and self-insuring through capital accumulation. I provide empirical evidence of this condition in the data by estimating the elasticity of substitution between capital and intermediates by industry using a panel of countries. We use annual time series data and filtering methods to document the key statistics of the India business cycle. Output, consumption and investment are more volatile than in developed economies. Like in developed countries, consumption is less volatile and investment is more volatile than output in the Indian data. Unlike in the former, investment is not highly correlated with output. We test whether a standard real business cycle model with technology and fiscal shocks, with parameters calibrated for the Indian economy can replicate the features of the business cycle. / Thesis (PhD) — Boston College, 2011. / Submitted to: Boston College. Graduate School of Arts and Sciences. / Discipline: Economics.

The first essay provides evidence on the origins of the size and value premiums by examining how order flow in the SMB and HML portfolios relates to economic conditions and investor sentiment. We find that buying pressure for SMB and HML is lower (increases) when economic conditions are expected to deteriorate (improve), while it is unrelated to proxies for investor sentiment and sales growth. These findings are consistent with big stock and value stocks being regarded as hedges against adverse shifts in economic conditions, and support a rational state variable interpretation of the size and value premiums. The second essay finds that the marketwide average of individual stock order flows and the difference between the average order flow for big stocks and the average order flow for small stocks (order flow differential) predict growth rates in real GDP, industrial production, and corporate earnings. The predictive significance of these two measures is robust to controls for return factors, suggesting a role for order flow in forecasting stock returns. Consistently, we show that an increase in the order flow differential forecasts higher returns for ten size-sorted portfolios and significantly greater market and size premiums in the subsequent quarter, even after accounting for a large host of variables. These findings are consistent with a world where aggregate order flow brings together dispersed information from heterogeneously informed investors. The third essay shows that stocks that are harder to value (stocks with less valuable growth options and more dispersed analyst forecasts) and stocks that attract less uninformed trading activity (small stocks, illiquid stocks, stocks not covered by analysts) have higher price impacts, greater probabilities of informed trading, and more private information in returns. In the time-series, reductions in trading activity and consumer sentiment increase the average price impact of trading and reduce the share of firm-specific information in returns. Recessions see high price impacts, low trading activity, and a smaller share of private signals in price movements. This reduction in private information seems to have an impact on the informativeness of prices for corporate managers: the sensitivity of corporate investment to the prices is significantly lower during recessions. / Finance