This thesis delves into the nature and effects of financial and monetary policy design. It comprises three chapters, each of which studies this topic from a different perspective and with a focus on different frictions. The first chapter derives theoretically the optimal monetary policy for a small open economy characterized by the incompleteness of the domestic financial market. In the model, a tight relationship between the consumption of different agents and the aggregate debtto-GDP ratio emerges in equilibrium. Optimal monetary policy is the result of a tradeoff between the stabilization of this ratio (risk-sharing) and the traditional policy objectives of price and output gap stabilization. Quantitative simulations suggest that price and output stabilization dominate debt-to-GDP stabilization in the optimal policy rule. Unlike the case of a closed economy, the policy objective of improving on risk-sharing is excessively costly from the point of view of the policymaker when the economy is open. The second chapter studies theoretical issues related to the unsecured consumer credit market, normally characterized by incompleteness and poor protection of property rights. The chapter describes a theoretical mechanism by which the interest rate to a given borrower is affected by the default choices of other agents. Individual agents ignore the effect of their own default choices on aggregate credit conditions, and thus the volume of unsecured credit in a decentralized market will be generally inefficient. The chapter employs simulations of the model to conclude that recently observed credit booms in Latin America may be inefficient. The third chapter analyzes empirically the relationship between information sharing and credit outcomes in the unsecured consumer credit market, focusing on the potential expost disciplinary effect and the ex-ante informational hold-up of long-lived negative information about borrowers. The chapter exploits a natural experiment in Colombia created by Law 1266/2008, whereby detailed information about past defaults that were exogenously “sufficiently old” was erased from Private Credit Bureaus (in what follows, PCB). Using a Differences-in-Differences (DD) specification, it is found that after old negative information is erased, there is a significant increase in the size and maturity of new loans, no significant changes in interest rates, and an increase in subsequent default rates for the treatment group, relative to the control group. Overall, these results are consistent with both ex-post disciplinary effects, and ex-ante information hold-up from long-lived negative information in PCB. Specifically, consistent with the hold-up theories, the chapter finds that most of the increase in the value of loans comes from outside banks. In addition, consistent with the disciplinary role of information sharing, the chapter finds evidence of a relative increase in the frequency of default for new loans after negative information is erased.

This thesis contains three chapters, each concerning the social welfare effects of fiscal policy. The first chapter examines the changes to government spending and tax rates that achieve a potentially substantial reduction in government debt at least cost to social welfare. The consequences of altering the speed of debt reduction are also examined. The second chapter considers how differences in monetary policy regime and stance may alter the optimal mix of spending and tax rate changes for government debt reduction. These two chapters make use of the representative agent theoretical framework. By contrast, the third chapter uses a framework of heterogeneous agents, in which there is a non-trivial distribution of wealth and income. The framework includes both aggregate and idiosyncratic uncertainty. The third chapter characterises a constrained efficient outcome in this framework. This outcome is treated as a welfare benchmark. The competitive equilibrium outcome is compared to this benchmark and shown to be constrained inefficient in certain circumstances. The sign and magnitude of constrained inefficiency in competitive equilibrium depends critically on the way in which aggregate shocks affect the distribution of idiosyncratic shocks. The extent of wealth inequality is also an important determining factor. Competitive equilibria under different fiscal policies are then considered as potential welfare improvements.

This thesis is a collection of essays on the important problems in developing countries and aims to contribute to the empirical literature on the i) financial services sector expansion and its implications on formal employment, i) impact of early retirement incentives on labour force participation rates and finally on the iii) effectiveness of stabilization funds on reducing the boom and bust cycles in light of fluctuating international commodity prices. Chapter 1 investigates the role of financial services expansion, especially the impact of increase in consumer credits on the reduction of informal employment. I argue that liberalization should naturally lead to a decline in the share of informal employment due to the fact that international firms are less likely to employ informally and consumers whose borrowing constraints are relaxed due to more credit availability are more likely to prefer goods that are paid with consumer credits. I test this hypothesis by exploiting the regional variation in Turkey. Due to the possible endogeneity problem, I employ several instruments and find positive impact of consumer services expansion on formal employment. Two unique datasets that I explore for for possible instruments are i) the religiosity and political tendencies surveys of 2011 and 2013, and ii) regional Armenian population loss data between 1914-1917 in the former Ottoman Empire that preceded the Turkish Republic. The exogenous variation that I seek to explore accordingly are; i) Islam bans all sorts of interest charges in financial transactions and therefore residents of more conservative regions are on average less likely to demand consumer credits, and ii) Armenians were the trading and artisan class of the Empire and therefore the main users of the financial instruments and when they perished. Chapter 2 is about the impact of a Social Security System that allowed women and men to retire as early as 38 and 44 years old on labour supply decisions in Turkey. Before the pension reform of 1999, the Law 3774, dated 1992 brought incentives to those individuals who several conditions to retire at a much earlier age than the conventional 60-65 years window. Using the Statistics on Income and Living Condition (SILC) panel dataset between 2007-2010 in a Fuzzy Regression Continuity Design, we find that these incentives let to an average decline of about 16.9 hours in weekly hours worked by men aged 44-52 and 20.6 hours decline in weekly hours worked by women who are aged between 39-49 in a bandwidth of three years around the eligible age for retirement. Moreover, we find that the entitlement for retirement after 44 years old reduced the probability of labour force participation of men by about 28% to 37% while we did not find a statistically meaningful impact on the participation decisions of women. Chapter 3 explores whether sovereign wealth or stabilization funds created by governments in oil rich countries are effective in reducing volatility and ensuring a counter-cyclical or acyclical fiscal policy in line with the optimal fiscal policy literature or whether they are just another government account in practise. The existing literature on the effectiveness of stabilization funds suffers from endogeneity problems, namely i) the endogeneity between gdp and government expenditures and ii) the endogenity of the decision to establish stabilization funds. In this paper, I contribute to the literature by addressing both of these problems by using a series of Two Stage Least Square Estimations and find positive evidence in favour of stabilization funds in reducing volatility and pro-cyclicality of the fiscal policy in oil rich countries. The findings are relevant for the wider discussion of the procyclicality in developing countries, as one third of the countries which are documented to improve fiscal policy cyclicality seem to be the ones that are resource rich and have a stabilization fund in place.

Electronic business (e-business) is of vital importance to the small and medium enterprise sector (SME); failure to participate may disadvantage them. This has been recognised and numerous SMEs are now adopting e-business. However, there has been little systematic research into how e-business is being adopted or the resulting changes that occur within the organisation. The investigation sought to discover whether the existing research into large organisations was applicable to the SME sector; the research found that it was not always relevant. Through an exploration of their level and sequence of adoption., structural re-alignment and process change, a greater understanding of how SMEs in the North West of England are adopting e-business is provided. Previous research has failed to de-lineate the actual use of e-business to depict the potential benefits available through adopting e-business. This research has addressed this issue along with providing an account of the areas where the benefits occurred. Positioned in the infonnation systems discipline from a business process perspective at the enterprise level, the implementation of e-business is investigated throngh a mixed mode methodology of research. The research which was conducted by the means of two empirical stages (questionnaire and interviews) found that SMEs do not always follow the sequential linear stages of progression suggested in the literature (DTI, 2000). The route taken is dependant on the use of e-business and the existence of an e-business strategy. It was also discovered that e-business causes minimal structural re-a1ignment When changes did occur, it was dependant on the use of e-business; with some of the organisations interconnecting components needing to be changed. Adopting e-business does not always cause SMEs to change their processes; neither does it affect all of the III different business activities. The research has identified where and how the processes are transformed; resulting in the presentation of a new model for SME e-business adoption.

Recent research has shown that the use of c-business can provide an important advantage in today's competitive business environment and it is likely that not using ebusiness will be a disadvantage in the future. Recent research has also shown the need for a strategic approach when undertaking a new investment such as c-business. In this context, small and medium enterprises (SMEs) face special problems; they are often dependent on larger enterprises where they are suppliers of products (goods or services)or the buyers of products. They also tend to neglect strategies more than large enterprises and they cannot adopt the strategies of large enterprises because of their different situation. The literature review discovered that research in this area is deficient. While the subjects SME, c-business, and strategy are frequently covered in academic literature there is insufficient research available covering integration of all three subjects. The research available suggests that, although general models and frameworks exist, SMEs generally do not use these models and frameworks and even tend to neglect strategies, operate without strategies or do not have the time to develop a strategy: they are reactive rather than proactive, when making decisions. For the first stage of the study a questionnaire was conducted with 1000 SMEs in the North West of England to find out more about the SMEs' e-business strategies. The analysis of the collected responses has corroborated the belief that many SMEs are neglecting c-business strategies and that they enter the e-business arena without careful planning. Moreover the data has indicated that the choice of strategic models, if any, is to a large extent confined to the use of one model. The data suggests that the SMEs can be grouped into five different clusters, according to their adoption of e-business technology and their use of general business and e-business strategies. For the second stage 29 SMEs from the five different clusters were interviewed to find out more about their use of e-business technologies, their c-adoption and their use of business strategies and e-business strategies. The interviews found that old fashioned SMEs, blind e-business users, formal strategy leaders, e-adoption leaders and e-business strategy leaders were distinct groups whose existence can also be confirmed through the interviews. The knowledge gained form this stage, together with the findings from the quantitative survey were used to create a model addressing the need of SMEs to develop e-business strategies in a quick and easy way. This work contributes to knowledge in the area of strategic management and information systems by providing a taxonomic classification of SMEs based on the dimensions of c-adoption, business strategy and c-business strategy and by providing a model that can help SMEs by allowing them to carry out suitable strategic analysis rapidly before undertaking an investment in c-business.

The main topic of the thesis is the effect of fiscal policy in dynamic-stochastic general equilibrium (DSGE) models. Fiscal Policy has received considerable attention after the introduction of the stimulus package of US Government in 2009. In addition, we allow for the fact that the zero lower bound on the short-term nominal interest rates was binding since 2008 in the US. In Chapter 1 we study a determinatistic labour tax cut at the zero lower bound to contribute to the literature by showing that a labour-tax cut increases GDP when non-Ricardian households and wage rigidity are included in the model. In chapter 2 and 3 (both co-authored with Ales Marsal) we depart from the assumption of zero lower bound. In particular, chapter 2 discusses the effect of fiscal pokicy on the yields of non-defaultable zero-coupon government bonds employing a New-Keynesian model with only price rigidity and Ricardian consumers. There are several empirical papers supporting the view that there is positive relationship between indicators of fiscal stance (like budget deficit) and yields of different maturities. We show that income taxation raises long-term nominal bond yields implying higher inflation-risks than with lump-sum taxation. Income taxation also generates a rise in inflation risks with smaller risk-aversion co-effiecient than the one needed in a model with time-varying inflation-target. In chapter 3 we extend the model used in chapter 2 with costly firm entry and find that the model is able to account for high bond and equity premia without compromising the fit of the model to key macro-economic regularities. The model is also sucessful in achieving inflation risks even with low coefficient on the output gap in the Taylor rule. The downside of this extension is that it yields a counterfactually low volatility of equity.

This thesis responds to the development policy debate on whether the popular Beijing Consensus is an alternative, especially for developing countries, to the Washington Consensus of market-friendly policies. The advocates of the Beijing Consensus have overlooked the facts that China’s development model has much in common with the Washington Consensus, China has profited from the globalisation, and the reform for establishing a market-oriented economy is the key factor of the rapid development and outstanding achievements in China. The critics have reluctantly acknowledged the successful strategies employed by the policy makers in Beijing, however, they branded China as an authoritarian country, and are wilfully or unintentionally blind to the diversity, inclusiveness and competitiveness in the ‘quasi-nonpartisan’ Chinese political system. This thesis explain how a farsighted government can increase long-run growth by fiscal policies, why free market and the ambitious government are not contradictory in China, and why so many ‘democratic’ countries violate the first two prescriptions of the Washington Consensus: fiscal discipline, and public expenditure priority to pro-growth investment. The theoretical analyses show that the strategy of a farsighted government is to sacrifice the first several generations but benefit all future generations through cutting nonproductive public spending and giving expenditure priority to productivity-enhancing expenditure, so that a higher growth rate leads to a ‘quasi-Pareto improvement’ among generations. Nevertheless, farsighted fiscal policy together with ‘hedonistic citizens’ has a side effect, the welfare loss for both the government and the citizens. The Barro model is an exception in which a farsighted government has no place to increase the growth rate because welfare maximisation equals growth maximisation. The empirical results reveal the strong substitution relationship between the government and nongovernment capital, and thus the general CES technology rather than the Cobb-Douglas technology is the suitable structure containing the two types of capital in the production function. However, the government capital has become more complementary to the nongovernment capital due to the deepening reforms of SOEs and fiscal policies since 1992.

The aim of the thesis is to investigate three banking issues related to competition, which are switching costs, collusion, and the competitive conditions in the Hong Kong banking sector during the period 1997 to 2012. For this purpose, a database consisting of an unbalanced panel of annual observations for 18 licensed banks incorporated in Hong Kong is used. This thesis comprises three empirical essays as follows: The first essay uses a structural model presented by Kim et al. (2003), which explores the significance and the magnitude of switching costs in Hong Kong’s bank loan market. Overall, I find that switching costs are significant in the Hong Kong bank loan market. The average point estimate of switching costs based on the entire sample is 0.1947. The results suggest that the existence of switching costs raises the price-cost margin by 52 basis points. Furthermore, the results also suggest that the estimated switching costs during the bad times are slightly higher than that in good times. On average, 2.54% of the customer’s added value is attributed to the lock-in effect generated by switching costs. The second essay measures the degree of collusion and the nature of the competitive conditions in the Hong Kong bank loan market using the conjectural variation approach. I jointly estimate a system of a log demand function, a pricing equation, and a trans-log cost system, and use the conjectural variation parameter to identify the degree of collusion. The estimated conjectural variation parameter is insignificant, which suggests that banks in Hong Kong operate in a competitive fashion in the loan market and the behaviour of the banks is consistent with a Nash-Bertrand equilibrium in price, with no significant evidence of collusion on pricing. The third essay investigates the degree of competition in the Hong Kong banking sector using the Panzar-Rosse approach. The novelty of this essay is to solve the problem of the system’s residuals correlation in the Panzar-Rosse model by jointly estimating equations using the SUR approach. My results suggest that the Hong Kong bank market can be characterized as monopolistic competition and the level of competition of interest market is higher than competition level of the non-interest market.

This thesis examines the relationship between foreign exchange (FX) volatility and excess returns from the currency market. We argue that FX volatility plays an important role in explaining the excess returns from the currency market so as in partially explaining the long stranding unsolved puzzles in FX market: the uncovered interest rate parity (UIP) puzzle and the purchasing power parity (PPP) puzzle. There are two empirical parts in this thesis. In the first part, we take the FX volatility risk as risk factors to price the cross sectional excess returns from the carry trade in three different settings, the unconditional ICAPM model, the conditional ICAPM model and a model separating the volatility risk into a persistent volatility risk factor and a less persistent volatility risk factor. For all three models, we find that the excess returns from the carry trade are negatively correlated with the FX volatility risk factors. The volatility risk factors are negatively priced and can explain about 90% cross sectional excess returns from the carry trade. We argue that the excess returns from the carry trade are compensations for bearing volatility risks, especially during high volatility risk period and regardless whether the volatility risks are persistent or not. In the second part, we investigate the puzzles in FX market under different FX volatility regimes. We find that the carry trade suffers from losses during high volatility period is because both the UIP and the PPP tends to reassert themselves under high volatility period, at least to some extent. Thus if we switch from the carry trade strategy to a PPP implied trading strategy during high volatility period, we could avoid the losses from the carry trade and have higher average excess returns. More importantly, we could make this “mixed” strategy tradable by using last period’s FX volatility state to forecast this period’s volatility state.

Bootstrap DEA is a valuable tool for gauging the sensitivity of DEA scores towards sampling variations, hence allowing for statistical inference. However, it is associated with generous assumptions while evidence on its performance is limited. This thesis begins with the evaluation of the performance of bootstrap DEA in small samples through a variety of Monte Carlo simulations. The results indicate cases under which bootstrap DEA may underperform and it shown how the violation of the fundamental assumption of equal bootstrap and DEA biases may affect confidence intervals and cause the evidenced underperformance. An alternative approach, which utilises the Pearson system random number generator, seems to perform well towards this respect. In particular, coverage probabilities converge to the nominal ones for samples as small as 120 observations and the bootstrap biases are very close to the DEA ones. In the presence of technological heterogeneity, though, poor performance is observed in all cases, which is not surprising as even the applicability of simple DEA is questionable. Using an illustrative example from the deregulation of the Greek banking sector during late 80s, potential differences arising from the various approaches are discussed. In particular, the theoretical explorations are extended to the case of the Global Malmquist productivity index, which is used to examine the productivity change of Greek banks during (de)regulation. Some differences are observed on the magnitudes of the estimated quantities of interest and on the probability masses at the tails of the relevant bootstrap distributions. Qualitatively, though, the overall conclusions are very similar; the provision of commercial freedoms enhanced the productivity of commercial banks whereas the imposition of prudential controls had the opposite effect. This result is of topical interest as the European Supervisory Mechanism, which recently assumed duties, will closely supervise “significant institutions” which includes the 4 biggest Greek banks and their banking subsidiaries.