Thesis advisor: Ryan Chahrour / The dissertation studies the sources of business cycles taking both an open and a closed economy perspective. A common feature of the two chapters composing the dissertation is the use of simple, but powerful classifications and identifications of sources of business cycles. In particular, the first chapter, titled “What are the Sources of Boom-Bust Cycles?”, concerns the distinction between economic fluctuations due to changes in beliefs, and fluctuations due to changes in fundamentals, showing results that challenge traditional approaches to modeling business cycles. The second chapter, titled “Shocks and Exchange Rates in Small Open Economies”, takes the perspective of small open economies, and concerns the distinc- tion between global and domestic shocks, showing results that are informative for a series of puzzling facts concerning the dynamics of the exchange rate. In “What are the Sources of Boom-Bust Cycles?,” joint with Marco Brianti, we provide a synthesis of two major views on economic fluctuations. One view maintains that expansions and recessions arise from the interchange of positive and negative persistent exogenous shocks to fundamentals. This is the conventional view that gave rise to the profusion of shocks used in modern dynamic stochastic general equilibrium models. In contrast, a second view, which we call the endogenous cycles view, holds that business cycle fluctuations are due to forces that are internal to the economy and that endogenously favor recurrent periods of boom followed by a bust. In this environment, cycles can occur after small perturba- tions of the long run equilibrium. We find empirical evidence pointing at the coexistence of both views. In particular, we find that the cyclical behaviour of economic aggregates is due in part to strong internal mechanisms that generate boom-bust phenomena in response to small changes in expectations, and in part to the interchange of positive and negative persistent fundamental shocks. Motivated by our findings, we build a theory that unifies the dominant paradigm with the endogenous cycles approach. Our theory suggests that recessions and expansions are intimately related phenomena, and that understanding the nature of an expansion, whether it is driven by fundamentals or by beliefs, is a first order issue for policy makers whose mandate is to limit the occurrance of inefficient economic fluctuations. In “Shocks and Exchange Rates in Small Open Economies,” joint with Pierre De Leo, we propose a novel approach to separately identify domestic and external shocks in small open economies. Our results provide guidance about the transmission mechanism of these shocks and revisit recent conclusions drawn on the exchange rate effects of monetary policy in small open economies. The identification method is based on the premise that shocks originating from within a small economy should not influence world variables at any horizon, while external (or global) shocks should affect world variables at least at some horizon. We obtain three empirically related findings. First, external shocks feature large deviations from uncovered interest parity, while domestic shocks do not. Second, external shocks strongly comove with global risk aversion and U.S. macroeconomic variables. Third, recent puzzling estimates of the exchange rate effects of monetary policy stem from an identification of domestic shocks that fails to properly account for international spillovers. We show that a two-country small open economy model with international asset market imperfections is consistent with these facts. In our proposed model, global risk aversion shocks drive exchange rate dynamics, and a country’s net foreign asset position governs their international transmission. We provide empirical evidence that a country’s exposure to external shocks indeed depends on its net foreign asset position. / Thesis (PhD) — Boston College, 2020. / Submitted to: Boston College. Graduate School of Arts and Sciences. / Discipline: Economics.

This dissertation combines micro-level empirical analyses and general equilibrium structural models to study shock propagation mechanisms and business cycles dynamics, with a particular emphasis on the role played by firms. In the first chapter, we study how regional shocks spill over across U.S. local markets through intra-firm market networks and explore how such spillovers reshape household welfare across regions. We link data on barcode-region-level prices and quantities with producer-level information to exploit variation in firms' initial exposure to differential drops in local house prices in the 2007-09 recession. We show that a firm's local sales decrease in response to not only direct negative local demand shock but also indirect negative local demand shocks originating in its other markets. Intra-firm cross-market spillover effects arise mainly from product creation and destruction, whereas direct local shock operates through the sales of continuing products. Spillover effects occur because (i) firms replace products that have higher value---sales per product, unit price, and organic sales share---with lower-value ones in response to negative demand shocks, and (ii) such product replacements are synchronized across many markets within each firm. Counterfactual analysis using an estimated multi-region model with endogenous quality adjustments shows that our channel works as a novel inter-regional shock transmission mechanism and generates an implicit regional redistribution effect. Such effect is economically sizable and is comparable to the size of transfer policies implemented during the Great Recession. In the second chapter, we investigate a role of supply chain network in transmitting housing market disruptions during the Great Recession. We build up a unique micro-level data that combines local housing market condition, firms' sales in each local market, and firm-level supply chain network information. Exploiting firm-specific demand shock stemming from cross-market variation in house price changes and an initial difference in firms' local sales, we find that such shock not only affects downstream firms but also transmits to their suppliers. The estimated supplier-level elasticity is quantitatively large, reflecting larger role of downstream firms with higher elasticity in the network structure. To quantify such propagation at the aggregate level, we build up a parsimonious network model calibrated to match the micro-level data. Our counterfactual analysis shows that approximately 18\% of the observed drop in the aggregate output can be attributed to the propagating role of the supply chain network. In the third chapter, we study the business cycle with a Translog production function. We empirically identify a complementarity between labor and energy that leads to procyclical returns to scale, which is not compatible with the tightly parameterized production function commonly used in the literature (Cobb-Douglas and CES). Therefore, we propose a flexible Translog production function that not only features complementarity-induced procyclical returns to scale but is also consistent with a balanced growth path. A simple calibrated business cycle model with the proposed production function generates strikingly data-consistent dynamics following demand shocks without relying on either nominal rigidities or countercyclical markups.

Existing empirical literature on political business cycles focused primarily on developed economies before it began considering a basket of both developed and developing economies. This study seeks to expand the existing literature by pursuing two objectives using Brazil, Russia, India, China and South Africa (BRICS) as locations of the study. The first objective is to examine the presence (lack thereof) of political business cycles in the BRICS trading block for the period 1994 to 2014. The second objective of this study is to examine the effect that political business cycles (if present) have on the sovereign credit ratings that the BRICS countries receive from credit rating agencies. Credit rating agencies make use of a combination of political, social and economic factors to determine the ratings assigned to various countries. The credit ratings assigned to countries by these agencies play an important role to international lenders as they use these ratings to make decisions on the interest rates they charge to different sovereigns. Based on the first objective, the findings from this study show that there is weak evidence of electorally timed interventions in BRICS economies over the period of 1994 to 2014. These findings are inconsistent with the predictions of political business cycle theory which suggests that incumbent politicians take advantage of the information gap between them and voters by implementing economic changes closer to an election year in order to exude competence and to increase their chances of reelection. However, further analysis based on the second objective shows that elections in BRICS countries are not viewed negatively by credit rating agencies. Hence, unlike in other developing countries, the BRICS countries are not likely to be downgraded during or after election years. Consequent to these findings, this study supports the notion that the government’s influence on the fiscal and monetary policy variables across BRICS is not concentrated nor overly exerted around election periods and that the BRICS countries’ institutions are regarded by rating agencies as independent and up to relevant international standards.

This dissertation finds significant differences in the micro-level household consumption behavior between emerging and developed economies, disentangles multiple possible explanations for these differences, and evaluates their macroeconomic implication on business cycles. The first chapter estimates the marginal propensity to consume (MPC) out of transitory income shocks using micro data for an emerging economy. To this end, I employ a nationally representative Peruvian household survey. Two striking differences emerge when the Peruvian MPC estimates are compared with U.S. MPC estimates obtained by the same method. First, the mean MPC of Peruvian income deciles is much higher than that of U.S. deciles. Second, within-country MPC heterogeneity over the deciles is substantially stronger in Peru than in the U.S. The second chapter studies the driving factor for the MPC differences between Peru and the U.S. I begin by exploring three possible explanations for the stronger MPC heterogeneity in Peru through the lens of a standard precautionary saving model: liquidity constraints, consumption front-loading behavior, and heterogeneous interest rates. Then, I disentangle these possible explanations by examining relevant data patterns appearing in the micro data. Specifically, participation rates in borrowing activities and consumption growth rate patterns of the income deciles suggest that liquidity constraints drive the stronger MPC heterogeneity in Peru. Then, I decompose the cross-country MPC gap into the component driven by liquidity constraints and the component caused by factors unrelated to liquidity constraints. To this end, I delineate a top income group unaffected by liquidity constraints in each country by conducting an MPC homogeneity test and evaluate its MPC. I find that liquidity constraints are also important for explaining the higher mean MPC in Peru. The third chapter makes a first attempt to study emerging market business cycles in a heterogeneous-agent open economy model. A central question in open economy macroeconomics is how to explain excess consumption volatility in emerging economies. This chapter argues that to understand this phenomenon, it is important to take into account households' idiosyncratic income risk, precautionary saving, and MPCs. Financial frictions determining asset liquidity in the model are calibrated such that MPCs are as high as empirical estimates from Peruvian micro data, which are substantially greater than the U.S. MPC estimates. I then estimate the model using macro data and Bayesian methods. The model captures the observed excess consumption volatility well. To highlight the importance of high-MPC households in driving this result, I show that excess consumption volatility disappears when households are counterfactually replaced with those exhibiting U.S. MPCs. High-MPC households contribute to consumption volatility through i) their strong consumption response to resource fluctuations and ii) large consumption reduction when assets become more illiquid. The transmission mechanisms of trend shocks and interest rate variations that previous studies use to explain excess consumption volatility are dampened because households significantly deviate from the permanent income hypothesis, on which these mechanisms crucially depend.

Note: Note: p. 61 missing.

Thesis (P H.D.)--University of Penneylvania, 1933. / Published also without thesis note.

Thesis advisor: Peter N. Ireland / This dissertation deals with the macroeconomic implications of fiscal policy in small open economies with a particular emphasis on emerging economies. I use both empirical and theoretical approaches to distinguish key difference in the design of fiscal policy between emerging and developed economies. I also analyze the macroeconomic consequences of differences in the conduct of fiscal policy. Thus, the dissertation is focused on the interplay between fiscal policy and business cycle dynamics. Recent policy challenges in developed economies, such as monetary authorities grappling with the zero lower bound on short run nominal rates and fiscal stimulus packages emerging as an important policy tool, have sparked renewed academic interest in the topic of fiscal policy and business cycles. Institutional and macroeconomic features in emerging economies make the macroeconomic aspects of fiscal policy an important research agenda and one to which this dissertation contributes. A number of papers have documented fiscal policy pro-cyclicality in terms of stronger co-movement between government expenditure and macroeconomic fundamentals in emerging and developing economies. This feature of the data raises 2 important questions: 1) does fiscal policy reinforce the macroeconomic cycle in these countries leading to heighten macroeconomic volatility ("when it rains, it pours"), and 2) is the fiscal stance in these economies due to unique macroeconomic features or is it the consequence of institutional and political imperfections? The first chapter, titled "When it rains, it pours": fiscal policy, credit constraints and business cycles in emerging and developed economies, sets out to answer these questions by comparatively studying a group of developed and emerging economies. I estimate a panel structural vector autoregressive model to investigate if government consumption expenditure responds more pro-cyclically to fundamentals and what role international financial conditions play for the fiscal stance and for the volatility of the cycle in emerging and developed economies. My findings suggest that the response to output fluctuations is not systematically different for emerging governments relative to their developed counterparts. However, emerging governments curtail spending in response to increases in the sovereign borrowing rate which forces their consumption expenditure to act more pro-cyclically. I find evidence of higher fiscal discretion in emerging economies. However, the efficacy of government consumption expenditure is substantially lower in emerging than in developed economies. Thus, fiscal policy ends up being responsible for a lower share of business cycle volatility in emerging than in developed economies. In the second chapter, titled Estimating the Dynamics of Fiscal Financing in Emerging Economies, I propose a strategy for estimating the government financing rule for an emerging economy. The estimation uses the structural VAR impulse responses obtained in the previous chapter to discipline the parameters of a small open economy real business cycle model with a public sector. The parameters can be split into two groups: those influencing the effectiveness of fiscal policy and the parameters governing the financing of the exogenous stream of government consumption. The empirical response to interest rate shocks puts restrictions on the first group of parameters governing the size of the multiplier. The empirical response to a government consumption shock can be used to obtain estimates of the fiscal policy rule. I construct a model with a role for both interest rate shocks and government consumption shocks. A natural estimation approach in this case is impulse response matching. / Thesis (PhD) — Boston College, 2018. / Submitted to: Boston College. Graduate School of Arts and Sciences. / Discipline: Economics.

Thesis (Ph. D)--Massachusetts Institute of Technology, Dept. of Economics, 1979. / MICROFICHE COPY AVAILABLE IN ARCHIVES AND DEWEY. / Vita. / Bibliography: leaves 145-148. / Ph.D

Thesis(Ph.D.)--Case Western Reserve University, 2009 / Title from PDF (viewed on 2009-11-23) Department of Management Includes abstract Includes bibliographical references and appendices Available online via the OhioLINK ETD Center

Thesis (Ph. D.)--University of Chicago, Dept. of Economics, 2002. / Includes bibliographical references. Also available on the Internet.