Doctor of Philosophy / Department of Economics / Lance Bachmeier / Steven Cassou / This dissertation consists of three essays in macroeconomic econometrics. The first essay investigates industry level production functions. Part of the interest in doing this is to contribute to the ongoing improvements in dynamic macroeconomic models which are increasingly disaggregating economies into industrial sectors. This paper provides useful production function parameter values for this endeavour. In addition, the paper shows that there are differences across industry level production functions, so model disaggregation cannot rely on a generic scaled down aggregate production function. Futhermore, evidence of these differences is provided in several ways. First, it is shown that some, but not all, industry level production functions exhibit constant returns to scale. Second, conducted pairwise tests show whether government capital production elasticities are the same for different pairs of industries. In the majority of these tests, the null hypothesis was rejected. In the second essay, the relevance of wage rigidities for understanding the effect of oil price shocks on output and inflation is examined. The theoretical framework of Blanchard and Gali (2007) is adopted and modified in two important ways. First, an empirically estimated wage adjustment cost function is incorporated following work by Kim and Ruge-Murcia (2009). Second, a realistic monetary policy function is incorporated into the model to be consistent with the current macroeconomic literature. The paper provides evidence that the degree of wage stickiness has little effect on the oil price-macroeconomy relationship. We find that the only way to generate large changes in the variances of output and inflation is to increase the wage adjustment cost by an extreme amount. The third essay assesses the statistical adequacy of the Cobb-Douglas aggregate production function with public capital as an input. The paper tests the statistical adequacy of the models proposed by Aschauer (1989a) and Tatom (1991) and finds that both models are misspecified. Furthermore, the paper finds that Tatom's model suffers from the same criticism he levels against Aschauer's model, non-stationarity in the data series used to estimate the model. Using Aschauer's framework, a properly specified model is found that models both deterministic heterogeneity and serial autocoreelation. Model results find that public capital is positive and significant. The results are in contrast to a large body of literature that discredits Aschauer's findings claiming his model is incorrect. Finally, an additional specification of the model using the student's t linear regression model is explored to capture potential heteroskedasticity.

Doctor of Philosophy / Department of Economics / Lance Bachmeier / Yang-Ming Chang / This dissertation comprises of three essays in international macroeconomics. The first essay investigates the competition between two city states, both of which will stand in place of countries in the global scheme. Under the framework of the three-stages-game, we assume that there are two cities competing for dominance over two sectors: the manufacturing sector and the financial sector. In addition, the government of each city state can build infrastructure to increase the competitiveness of the financial and distributive firms of its city. Under this framework, we are able to show that the amount of resources, the start-up costs of providing services, and the relative effectiveness of their infrastructures determine the optimal amounts of infrastructures the cities decide to build, and thus also decide the equilibrium outcome of this game. In my second essay, we examine the relationship between income distribution and import patterns. The Linder hypothesis states that countries with similar economic characteristics should trade more often. However, although the total volumes of trade between these countries are similar, the traded goods may be different. This paper investigates the trading patterns of countries with similar characteristics. Specifically, we analyze the relationship between the import patterns and income distributions of importers. We develop an import similarity index to portray the composition of imports and utilize the idea of a "market overlap," a theoretical concept proposed by Bohman and Nilsson (2007), to represent the similarity of income distributions across different importing countries. We provide empirical evidence to support the notion that countries with similar income distributions display similar import patterns. We also separate countries by income level and find that income distribution exerts a positive impact on the similarity of import patterns for all but low income countries. Finally, we incorporate the characteristics of goods into our analysis and show that the positive relationship between income distributions and import patterns holds for differentiated and reference-priced goods, but not for homogeneous goods. In my final essay, we look into another aspect of international literature: the exchange rate. In the literature, we find that vector autoregressive (VAR) models and impulse response analyses are common tools to study the relationship between monetary policy and exchange rate movements. Therefore, it is important to investigate the accuracy of the VAR model. In the first part of this essay, we assume that the true, underlying, data-generating process is hump-shaped, which is the shape of the impulse response of exchange rate to a monetary policy shock. We show that results estimated from any VAR models applying AIC as their lags selection are biased. We also introduce two possible solutions to remedy this bias: the use of more lags in the VAR models or the use of the proposed loss functions estimations. These results suggest we should be cautious when interpreting empirical evidences on international literature. In the second part of the same essay, we investigate another issue that is closely related to the exchange rate and the VAR model. Under the estimation of the VAR model, the researcher implicitly assumes that the objective loss function is quadratic. However, it is a well accepted fact that monetary authority adjusts the interest rate according to policy. One of the objectives of the monetary authority is to influence the exchange rate in their favor. They estimate the size of the loss caused by deviations from the current exchange rate to the rate they desire, and then they adjust the amount of money in the international market. We propose an asymmetric loss function that monetary authorities may use to estimate the impulse response of the exchange rate to a contractionary monetary policy shock. We then compare these estimated impulse response functions to those estimated by the VAR. We find that while both of these estimated impulse response functions share the same sign, the magnitude and the duration of the shock are quite different. These results suggest that the VAR model may not be appropriate in estimating the exchange rate movement.

Master of Arts / Department of Economics / Tracy M. Turner / The recent housing crisis has highlighted the need to better understand the determinants of mortgage default. Concerns about potential sizable differences in default rates by race and ethnicity as well as reports in the popular press regarding the propensity for rising numbers of homeowners to strategically default motivate a careful study of mortgage delinquency in America post-housing bubble. Using longitudinal data from the Panel Study of Income Dynamics (PSID), we examine borrowers in the years 2005, 2007 and 2009 and, controlling for a number of default-related variables, take a closer look at the characteristics of those delinquent on their mortgage by 2009. We find startling racial and ethnic gaps present as well as strong effects from children, education, and the presence of recourse/non-recourse laws in the state of residence on the likelihood of delinquency. In addition, we find evidence that strategic default plays a role in explaining the likelihood that a homeowner in 2005 will be delinquent on his or her mortgage by 2009.

Master of Arts / Department of Economics / Steven P. Cassou / In this report, I investigate the possibility of a monetary unification among the Arab States. The Gulf Cooperation Council (GCC) states that include Bahrain, Saudi Arabia, Qatar, UAE, Kuwait and Oman are coming together on the basis of common ethnicity, religion, culture, traditions, and monetary issues. This research will discuss different factors upon which the monetary unification and the birth of a new currency depend. For comparison to the Euro, I closely examined different factors such as inflation rates, exchange rates, trade, etc. over the past decade. As stated, this examination was done to see how these factors compare with those of the Euro region to determine if a similar monetary unification among the GCC states is possible. The target date for launching the new GCC currency was January 1, 2010; however that date has long passed. Although the above mentioned factors are favorable to currency unification of the GCC states, ample time is necessary to achieve such a herculean feat. After all, the Europeans did not achieve the unification of the Euro in one night. One hurdle to unification is that the GCC states still need to control the inflation rates in their own economies. Other economic factors, such as trade, have been favorable for all the GCC states, and all the states have been doing well in terms of the U.S. dollar (USD). Although unification may not have met the January 1, 2010 goal, the GCC will still be observing the economic factors and considering other possible scenarios. All the GCC countries vow to achieve this unification.

Doctor of Philosophy / Department of Economics / Steven P. Cassou / This dissertation consists of three chapters. The first chapter surveys recent studies on the stability of the money demand function in selected developing countries. This chapter presents specific details about modeling and estimating the money demand function. Also, reasons behind the mixed results in the literature on the stability of the money demand function are explored as well as providing a guideline for future research on the stability of the money demand function in developing countries. The second chapter empirically investigates the stability of the money demand function in South Korea and Malaysia. The conventional money demand specification and cointegration framework with a single unknown structural break are conducted. The results of the residual-based tests for cointegration reveal that the M1, M2, and M3 demand are stable in the long run in Malaysia. However, there is no evidence of the stability for all three measures of the money demand in South Korea. The results of the residual-based tests suggest that structural breaks in the cointegration vectors are important and need to be accounted for in the specification of the M1, M2, and LF demand in South Korea, where LF includes M2 in addition to the reserves of nonbanking financial institutions and long-term deposits. The third chapter complements the previous chapter. It aims to evaluate the stability of the money demand function in South Korea and Malaysia using a cash in advance model and cointegration framework with one unknown structural break. This theoretical model adds short-term foreign interest rates and real exchange rates in addition to short-term domestic interest rates and real income. Also, the Granger causality and currency substitution analysis are conducted in this chapter. The results of the residuals-based tests indicate that the M2 and LF demand in South Korea, and M1, M2, and M3 demand in Malaysia are stable in the long run. The structural breaks may not be fairly absorbed when a cash in advance model is used for M1 in South Korea. Thus, the residual-based tests suggest that the structural break is still important and needs to be included in the specification of the M1 demand in South Korea.

Master of Arts / Department of Economics / Lloyd B. Thomas Jr / The European sovereign debt crisis has had a profound impact on the rest of the world. The “debt crisis” refers to the rapid accumulation of debt within some struggling euro-zone countries. This debt accumulation has resulted in a variety of financial bailouts made to various countries within the European Union and a debt default by the country of Greece. The results of this crisis have changed the way of life for many living within the struggling economies. Division within the euro zone, on both policy and ideology, has begged the question of whether the euro will be able to survive in the long term. The purpose of this report is to investigate the buildup and evolution of this crisis, as well as to highlight various responses and proposed solutions of the future.

Master of Arts / Department of Economics / Lloyd B. Thomas / A negative-sloped Treasury curve is often cited in financial news articles and by Federal Reserve economists as a predictor of recessions. This report reviews previously published research examining the reliability of yield curves predicting recessions. Findings show that the yield curve inverts two or more quarters before recessions, with short-term interest rates rising above long-term interest rates. Probit regression has proven a reliable method for generating estimated probabilities of future recessions that, in turn, are useful for both monetary policy and asset allocation decision-making.

Master of Arts / Department of Economics / Steven P. Cassou / This report shows the mathematics behind the solution to continuous time optimization problems. It shows how to specify the Hamiltonian function, how to use the Hamiltonian to obtain the optimal conditions for a typical economic optimal control problem and applies these techniques to several optimal control problems commonly encountered in macroeconomics. An appendix shows how to set up the optimal conditions for the case in which the state and co-state variables are both vectors. A second appendix shows how to approach the control situation for a system of optimal control problems where the co-state variable for the first sub-optimal control problem is the state variable for the second sub-optimal control problem.

Doctor of Philosophy / Department of Economics / Philip G. Gayle / This dissertation seeks to answer questions regarding changes in the competitive environment in international air travel markets which has undergone rapid changes since the early 1990s. Specifically, the research in this dissertation examines policies regarding cooperation among airlines in international air travel markets as well as how cooperation affects an airline's product quality. These issues are explored in two essays which comprise my dissertation. The first essay explores the efficacy of a policy known as a carve-out. Airlines wanting to cooperatively set prices for their international air travel service must apply to the relevant authorities for antitrust immunity (ATI). While cooperation may yield benefits, it can also have anti-competitive effects in markets where partners competed prior to receiving ATI. A carve-out policy forbids ATI partners from cooperating in markets policymakers believe will be most harmed by anti-competitive effects. We examine carve-out policy applications to three ATI partner pairings, and find evidence of tacit collusion in carve-out markets in spite of the policy, calling into question whether consumers benefited from application of the policy in the cases studied. The second essay examines the relationship between product quality and airline cooperation. Much of the literature on airline cooperation focuses on the price effects of cooperation. The key contribution of our paper is to empirically examine the product quality effects of airline cooperation. Two common types of cooperation among airlines involve international alliances and antitrust immunity (ATI), where ATI allows for more extensive cooperation. The results suggest that increases in the membership of a carrier's alliance or ATI partners are associated with the carrier's own products having more travel-convenient routing quality. Therefore, a complete welfare evaluation of airline cooperation must account for both price and product quality effects.

Master of Arts / Department of Economics / Peri Da Silva / The literature concerning foreign direct investment and the spillover effects on domestic firms has developed significantly over the past two decades. This report examines the historical data on foreign direct investment flows and identifies several different types of spillover effects. Earlier studies identify potential horizontal spillovers but later studies suggest that these spillovers are insignificant. Recently, vertical spillovers, especially through backward linkages, have been identified as occurring in the host country. Studies indicate that this is happening particularly in the manufacturing sector for firms relying on inputs from the services sectors that have higher levels of foreign direct investment.