This thesis re-examines a common assumption entering theoretical models of endogenous switching costs. Through a discrete choice experiment we test the hypothesis that consumers are heterogeneous in the way they respond when firms offer repeat purchase discounts through loyalty schemes. The assumption itself is important because in practice, heterogeneity in consumer switching costs holds implications for firms’ strategies and their resultant market shares. This thesis presents a flexible methodology for a discrete choice experiment inspired by the UK groceries sector using novel techniques in D-efficient experimental survey design. When fitting the data to the mixed logit model, we find that consumers’ taste varies significantly more for loyalty schemes than for any of the other variables entering the model. The results of our discrete choice experiment show that consumers differ significantly in how they respond to repeat purchase discount strategies. On this basis, it is likely that theoretical models of loyalty schemes overemphasise the effects of loyalty schemes on price competition. We argue instead, that a repeat purchase discount strategy will not result in a unilateral increase in artificial switching costs for all consumers in the market. We propose that forward looking firms are likely to recognise the limitations to scheme effectiveness due to heterogeneity in switching costs and will be more likely to invest in their customer base through future lower prices. Therefore from a competition policy perspective, we argue that in a fast paced retail market for non-durable goods, loyalty schemes are more likely to intensify competition for the benefit of consumers rather than act as an exclusionary device.

The main contribution of the thesis is the construction of noise-augmented asset pricing models. These models are the extension of Fama & French Three Factor Model (1992,1993) and subsequent improved version of Five Factor Model (2015), by adding a behavourial factor - investor sentiment (INVSENT). To the author’s knowledge, this is one of the first attempts to quantitatively reconcile risk based theory and behavioral finance by developing parsimonious asset pricing models for explaining value premium phenomenon, especially in the context of financial crises. Little research has been carried out on the value premium phenomenon over a short horizon during high volatility period. Previous empirical results show that over the long run, value stocks outperformed growth stocks, with considerable firm size effect. There are two competing schools of thoughts that explain the value premium phenomenon - risk based theories and behavior models. However, the occurrence of the Global Financial Crisis and Eurozone Crisis has opened a new and alternative window to study the value premium phenomenon and further examine the underlying reasoning. Firstly, in examining the risk and return relationship of value stocks and growth stocks of the Greater China stock markets during the two major financial crises, it show that growth stocks outperformed value stocks during both the Global Financial Crisis and Euro Zone Crisis in the China and Hong Kong stock markets. However, value stocks outperformed the growth stocks in the Taiwan stock market during the Global Financial Crisis and Euro Zone Crisis. The small size effect did not really diminish in the Greater China stock markets during two major financial crises. Also, standard risk measures – standard deviation and Sharpe ratio do not fully explain the risk and return relationship of these two stock selection strategies. Secondly, in explaining value premium under the Banko, Conover and Jensen Model (2006), mixed results are observed. During the Global Financial Crisis, industry book-to-market ratio is a strong signal in the China and Hong Kong stock markets, whereas the firm book-to-market ratio is a strong signal in the Hong Kong and Taiwan stock markets. Further analysis at the industrial level has revealed that industry book-to-market ratio is a more prominent factor than the firm book-to-market ratio. During the Euro Zone Crisis, the firm level book-to-market ratio is significant the Hong Kong stock markets, even after controlling for market capitalisation and beta. The study under the Fama and French Three Factor Model (1992, 1993) has shown that the three risk measures - market risk premium (MRP) factor, SMB factor and HML factor are semi-strong signals in explaining value premium in the Greater China stock markets during the two major financial crises. Furthermore, the investigation under the Fama and French Five Factor Model (2015) has shed light that the five risk measures - market risk premium (MRP) factor, SMB factor, HML factor, profitability factor (RMW) and investment factor (CMA) are semi-strong signals. Considering the values of adjusted R-squared and varying signals of the risk measures, it is argued that risk factors of the three asset pricing models do not fully explain value premium phenomenon in the Greater China stock markets during the two major financial crises. Thirdly, the study under the noise-augmented capital asset pricing models reveals that the investor sentiment (INVSENT) factor is a statistically significant determinant of the stock returns in the Hong Kong stock markets during the Euro Zone Crisis. The investor sentiment (INVSENT) factor is only weakly significant or insignificant statistically in the China and Taiwan stock markets during these two financial crises. For the risk measures in the Fama and French’s models, market risk premium (MRP) factor, SMB factor, HML factor, profitability factor (RMW) and investment factor (CMA) are semi-strong signals. The adjusted R-squared values of the noise-augmented asset pricing models are higher than the original Fama and French models. The findings of this research are expected to provide a fresh insight to the investment managers in the asset allocation and portfolio management decision. The practical implication is that when investing during the period of financial crises, one has to firstly, be selectively in stocks and hence businesses involved, relying on the principles embodied in the risk based model – Fama and French Five Factor Model. Then, be aware of the mispricing caused by the investor sentiment. The mispricing may present opportunities for contrarian investment strategy.

Prompted by calls to examine social and environmental disclosure beyond developed countries and, in particular, by studies that have begun to investigate practices in the Middle East and North Africa (MENA) region, this study presents a comprehensive analysis of corporate environmental disclosure (CED) by firms in Arab MENA countries. Using a detailed research instrument consisting of 55 items in five categories, a multi-country content analysis of the annual reports of 180 industrial and service sector companies listed on nine of the region’s major stock markets was conducted for a five-year period from 2010 to 2014. Consistent with previous studies that applied balanced panel data, the further statistical analysis was conducted by using Ordinary Least Squares (OLS) technique and supported by carrying out other estimations including a fixed-effects model, lagged-effects model, a weighted disclosure index model, and a two-stage least square (2SLS) model. Theoretically, an institutional framework has been employed to interpret CED practices in the MENA region using the three isomorphic pressures (i.e., mimetic, coercive, and normative). The calculation of an unweighted disclosure index indicates that, although the level of disclosure might be considered relatively low, it increased significantly over the period 2010 to 2014. There are some differences between countries in any given year, but the growth in disclosure is observed to be a region-wide phenomenon. Analysis of five categories of environmental disclosure and the behaviour of different types of the company not only reveals some interesting patterns but also reinforces the picture of a widespread general increase in disclosure. Although firm-specific characteristics (i.e., firm size, profitability, leverage, industry, auditor type) are positively and significantly related to CED in the MENA region, the influence of country-level governance (i.e., voice and accountability, government efficiency, and control of corruption) is heterogeneous in that they may have enhanced or reduced CED levels in annual reports across the nine MENA countries. Additionally, CED reflects the different region-specific pressures (i.e., business cultures and business environment). By using institutional theory, the study argues that country-level institutional factors, representative of the social context of a company’s operational environment may either encourage or discourage the adoption of CED in the countries across the MENA region. Since a relatively comprehensive disclosure index was used, it is unlikely that the study was biased against any particular country or type of company and so it provides a sound basis for comparison across the Arab MENA region. The study also provides a systematic picture for policymakers in the region as well as future researchers.

This dissertation can be thematically grouped into two categories: monetary theory in the so called New Monetarist search models where money and credit are essential in terms of improving social welfare, and optimal time-consistent monetary and fiscal policy in New Keynesian dynamic stochastic general equilibrium (DSGE) models when the government cannot commit. Arguably, the methodology and conceptual frameworks adopted in these two lines of work are quite different. However, they share a common goal in helping us understand how and why monetary factors can affect the real economy, and how monetary and fiscal policy should respond to developments in the economy to improve social welfare. There are two chapters in each part. In the first chapter, recent advances based on the pre-eminent Lagos-Wright (LW) monetary search model are reviewed. Against this background, chapter two introduces collateralized credit inspired by a communal responsibility system into the creditless LW model, in order to study the role of money and credit as alternative means of payment. In contrast, the third chapter revisits the classic inflation bias problem associated with optimal time-consistent monetary policy in the cashless New Keynesian framework. In this chapter, fiscal policy is trivial, due to the assumption of lump-sum tax. As a follow-up work, chapter four studies optimal time-consistent monetary and fiscal policy mix as well as debt maturity choice in an environment with only distortionary taxes, endogenous government spending and government debt of various maturities. Chapter 1 introduces the tractable and influential Lagos-Wright (LW) search-theoretic framework and reviews the latest developments in extending it to study issues concerning the role of money, credit, asset pricing, monetary policy and economic growth. In addition, potential research topics are discussed. Our main message from this review is that the LW monetary model is flexible enough to deal with numerous issues where fiat money plays an essential role as a medium of exchange. Chapter 2, based on the LW framework, develops a search model of money and credit motivated by a historical medieval institution - the community responsibility system. The aim is to examine the role of credit collateralized by the community responsibility system as a supplementary medium of exchange in long-distance trade, assuming that entry cost and the cost of using credit are proportional to distance, due to factors like direct verification and settlement cost and indirect transportation cost. We find that both money and credit are useful in the sense of improving welfare. In addition, the Friedman rule can be sub-optimal in this economy, due to the interaction between the extensive margin (that is, the range of outside villages which the representative household has trade with) and the intensive margin (that is, the scope of villages where credit is used as a supplementary medium of exchange). Finally, higher entry cost narrows down the extensive margin, and similarly, higher cost of using credit, ceteris paribus, reduces the usage of credit and hence lowers social welfare. Chapter 3 reconsiders the inflation bias problem associated with the renowned rules versus discretion debate in a fully nonlinear version of the benchmark New Keynesian DSGE model. We ask whether the inflation bias problem related to discretionary monetary policy differs quantitatively under two dominant forms of nominal rigidities - Calvo pricing and Rotemberg pricing, if the inherent nonlinearities are taken seriously. We find that the inflation bias problem under Calvo contracts is significantly greater than under Rotemberg pricing, despite the fact that the former typically exhibits far greater welfare costs of inflation. In addition, the rates of inflation observed under the discretionary policy are non-trivial and suggest that the model can comfortably generate the rates of inflation at which the problematic issues highlighted in the trend inflation literature. Finally, we consider the response to cost push shocks across both models and find these can also be significantly different. Thus, we conclude that the nonlinearities inherent in the New Keynesian DSGE model are empirically relevant and the form of nominal inertia adopted is not innocuous. Chapter 4 studies the optimal time-consistent monetary and fiscal policy when surprise inflation (or deflation) is costly, taxation is distortionary, and non-state-contingent nominal debt of various maturities exists. In particular, we study whether and how the change in nominal government debt maturity affects optimal policy mix and equilibrium outcomes, in the presence of distortionary taxes and sticky prices. We solve the fully nonlinear model using global solution techniques, and find that debt maturity has drastic effects on optimal time-consistent policies in New Keynesian models. In particular, some interesting nonlinear effects are uncovered. Firstly, the equilibrium value for debt is negative and close to zero, which implies a slight undershooting of the inflation target in steady state. Secondly, starting from high level of debt-GDP ratio, the optimal policy will gradually reduce the level of debt, but with radical changes in the policy mix along the transition path. At high debt levels, there is a reliance on a relaxation of monetary policy to reduce debt through an expansion in the tax base and reduced debt service costs, while tax rates are used to moderate the increases in inflation. However, as debt levels fall, the use of monetary policy in this way is diminished and the policy maker turns to fiscal policy to continue the reduction in debt. This is akin to a switch from an active to passive fiscal policy in rule based descriptions of policy, which occurs endogenously under the optimal policy as debt levels fall. It can also be accompanied by a switch from passive to active monetary policy. This switch in the policy mix occurs at higher debt levels, the longer the average maturity of government debt. This is largely because high debt levels induce an inflationary bias problem, as policy makers face the temptation to use surprise inflation to erode the real value of that debt. This temptation is then more acute when debt is of shorter maturity, since the inflationary effects of raising taxes to reduce debt become increasingly costly as debt levels rise. Finally, in contrast to the Ramsey literature with real bonds, in the current setting we find no extreme portfolios of short and long-term debt. In addition, optimal debt maturity, implicitly, lengthens with the level of debt.

This thesis is comprised of six Chapters on US Conventional and Unconventional Monetary Policy and their interaction with fiscal policy, both domestically and internationally. Chapter 1 introduces the main themes of the thesis. Chapter 2 studies the theoretical background of the thesis. After setting out key themes and the theoretical background in the introductory Chapters, the first core Chapter, i.e. thesis Chapter 3, examines the interaction between fiscal and monetary policy. Price puzzles are a repeated feature of empirical VAR models studying the effect of monetary policy. These price puzzles are often believed to appear due to the lack of information. However, we show that whether monetary and fiscal policy are active or passive influences the appearance of the price puzzle. This is because an active fiscal policy and a passive monetary policy can encourage private expenditure through a positive wealth channel. An active fiscal policy means fiscal authorities set expenditure regardless of tax revenues, while a passive monetary policy refers to a weak response of the policy interest rate to inflation. Finally, we find evidence in this Chapter that fiscal policy stimulates economic activity, i.e. it is non-Ricardian. Chapter 4 examines the effect of monetary and fiscal policy interactions in an international context. In particular, it considers the international spillovers of US monetary policy, whilst account for fiscal policy. This Chapter shows that US government debt influences the duration of the responses to a monetary contraction. Furthermore, it is shown that an increase in US government debt influences both the short and long-term interest rates, inflation, and output in the Euro Area and UK. This is through a positive wealth effect. In addition, the results of Persistence Profiles test, i.e. how fast we converge upon equilibrium following a shock, suggest that accounting for US government debt delays the return to equilibrium following monetary policy shocks. This may be due to the impact of fiscal policy on inflation and its persistence. Chapter 5 studies Unconventional Monetary Policy (UMP). It is shown that UMP increases output and inflation in the US, and generates spillovers to the Euro Area and UK. Furthermore, we present evidence that the portfolio balance is the transmission channel of UMP. That is UMP contributes to lowering the bound yields while it increases the price of assets. Chapter 6 concludes and summarizes the thesis, and provides a discussion of policy implications.

This thesis examines the impact of oil price movements on the UK economy. To this end, it is composed of three chapters which use different approaches in order to assess the causes and the consequences of oil price shocks on the main UK macroeconomic fundamentals. In Chapter 1, we analyse the impact of oil price fluctuations on the UK economy using a two-stage method. This empirical strategy allows us to decompose oil price changes depending on the underlying source of the shock. In line with previous studies, our results show that, since the mid-1970s, oil price movements have been mainly associated with shocks to oil demand rather than oil supply. We contribute to previous literature by finding that the consequences of oil price changes on UK macroeconomic aggregates depend on the different types of oil shocks. Thus, for instance, increases of global real economic activity do not depress the domestic economy in the short run. Conversely, shortfalls in crude oil supply cause an immediate fall of UK GDP growth. As a consequence, the Bank of England sets the nominal interest rate depending on the nature of the shock hitting the oil market. Our results also show that domestic inflation increases following a rise in the real oil price. Finally, we find that in response to oil price increases, although UK macroeconomic fundamentals worsen, the government deficit reduces. In Chapter 2, we develop and estimate, using Bayesian methods, an open economy two-bloc DSGE model in order to analyse the responses of the UK economy and the rest of the world to different sources of oil price shocks. We consider the period in which the UK was a net oil exporter that also corresponds to the Non-Inflationary, Consistently Expansionary (NICE) decade (1990-2005). In line with previous literature, our findings confirm that global oil shocks are mainly responsible for UK oil price changes. Our impulse response analysis shows that a drop in the oil price stimulates UK GDP and reduces domestic inflation inducing the BoE to lower the nominal interest rate. In contrast to previous studies, we find that the UK exchange rate responds differently according to the source of oil price shocks. In particular, a positive shock to foreign oil intensity induces an appreciation of the Pound. Conversely, a positive shock to foreign oil supply causes a depreciation of the British Sterling. Generally, a fall in the oil price worsens the UK trade balance, since UK is a net oil exporter. Finally, our historical decomposition analysis contributes to previous literature by showing that episodes of sharp increases in the oil price are associated with falls in the UK output and rises in the domestic inflation. In Chapter 3, we study the main transmission channels of oil price fluctuations for the UK economy and the consequences of oil price changes on its public finances. Our model is estimated with Bayesian techniques over the same sample period as in Chapter 2. In line with previous literature, our results show that foreign oil demand and supply shocks are the main factors explaining the UK oil price volatility. In contrast to existing studies we find that the variation of UK government debt is broadly explained by oil price fluctuations related to changes in the foreign oil intensity. We extend the previous literature by estimating the parameters of several fiscal policy rules. In particular, we find that the response of petroleum revenue tax to oil price changes is stronger than the response of fuel duty tax to domestic oil demand. In line with Chapter 2, our impulse response analysis indicates that a decrease in the oil price positively affects the UK economy inducing an increase in its GDP and a fall in the domestic inflation. However, the drop in the oil price generates a negative effect on the UK trade balance. In contrast to Chapter 2, we find that a positive foreign oil intensity shock causes depreciation in the Pound. The latter effect occurs as the decrease in the UK VAT causes a reduction in the price of domestic consumption goods. Finally, we are able to quantify the size of the responses of UK public finances to oil price shocks. Our results indicate that a fall in the oil price induces a reduction in UK total tax receipts and, in turn, causes the rise in the government debt. Thus, for example, we find that a positive shock to foreign oil intensity increases UK government debt by £ 700 millions during the first year and £ 1100 millions in four years.

After an introductory chapter, the thesis is divided in three parts. In the first part, chapter 2 includes domestic financial dollarisation into an otherwise standard DSGE model of a small open economy. Domestic financial dollarisation implies that some of the assets of households and some liabilities of financial intermediaries are denominated in a foreign currency. The main implication is that exchange rate swings affect the financial wealth of households and disrupt production. The chapter also derives a New-Keynesian Phillips curve augmented with agency costs. Chapter 3, sets up a framework whereby demand substitution occurs when cheaper imported goods appear and trigger a propagation mechanism in non-tradeable prices. As in the previous chapter, Chapter 3 disentangles the dynamics of inflation exploring yet another effect that explains how the fall in world inflation might drag down non-tradeable inflation in a small open economy. The second part of the thesis deals with operational issues; notably the inflation forecast and instrument setting. Chapter 4 proposes a Bayesian method to combine model-based density forecasts with policy makers’ subjective priors. Next, Chapter 5 estimates forward-looking interest rate rules by quantile regressions. The advantage of quantile regressions is that we can learn about the likely feedback from forecasts to instruments, not only on the mean value but on different quantiles of the inflation forecast distribution. Thus, we can gain some added information about monetary authorities’ risk balance or the nature of their loss function. In the last part of the thesis, Chapter 6 provides an econometric evaluation of the effects of inflation targeting adoption on the dynamics of inflation. This evaluation covers developed and emerging-market inflation targeters alike.

In this thesis, I study asset pricing models of stock and bond returns, and therole of macroeconomic factors in explaining and forecasting their dynamics. The first chapter is devoted to the identification and measurement of risk premia in the cross-section of stocks, when some of the risk factors are only weakly related to asset returns and, as a result, spurious inference problems are likely to arise. I develop a new estimator for cross-sectional asset pricing models that, simultaneously, provides model diagnostic and parameter estimates. This novel approach removes the impact of spurious factors and restores consistency and asymptotic normality of the parameter estimates. Empirically, I identify both robust factors and those that instead suffer from severe identification problems that render the standard assessment of their pricing performance unreliable (e.g. consumption growth, human capital proxies and others). The second chapter extends the shrinkage-based estimation approach to the class of affine factor models of the term structure of interest rates, where many macroeconomic factors are known to improve the yield forecasts, while at the same time being unspanned by the cross-section of bond returns. In the last chapter (with Christian Julliard), we propose a simple macro model for the co-pricing of stocks and bonds. We show that aggregate consumption growth reacts slowly, but significantly, to bond and stock return innovations. As a consequence, slow consumption adjustment (SCA) risk, measured by the reaction of consumption growth cumulated over many quarters following a return, can explain most of the cross-sectional variation of expected bond and stock returns. Moreover, SCA shocks explain about a quarter of the time series variation of consumption growth, a large part of the time series variation of stock returns, and a significant (but small) fraction of the time series variation of bond returns, and have substantial predictive power for future consumption growth.

This thesis examines some features of the labour market, and their macroeconomic consequences. The first paper relates the observed flatter Phillips Curve to the rise in labour turnover and temporary employment. In a New Keynesian model of sticky wages, workers or unions discount future wage income with a low discount factor if there is a strong flow of job turnover. In the New Keynesian wage Phillips Curve, this implies that future inflation is discounted more heavily than without job turnover. In the long run, the Phillips Curve is much flatter, and is no longer vertical or near-vertical; in the middle and long run, the curve appears flatter as turnover creates a bias if it is not accounted for. The second paper studies the impact of a rise in monopsony in the labour market: wages are set by employers instead of workers/unions. If rigid wages are set by monopsonistic employers and there is inflation, the fall in the real wage lowers the labour supply. In such a world, inflation is contractionary: the Phillips curve is inverted. The paper then examines a model where employers and employees both have market power, and use it to bargain over wages. The slope of the bargained Phillips Curve depends on each side's relative power. An increase in employers' power flattens the Phillips Curve. The last paper accounts for the possibility of featherbedding (or overmanning) in the labour market. In such a case, unions are able to impose a level of employment above the firm's optimum. In other words, the wage is above the worker's marginal rate of substitution, and above the firm's marginal product of labour. In this case labour market rigidities act as a distortionary tax on profits rather than employment; this generates a different source of inefficiency. While these distortions are very costly in the long run, removing them can be detrimental to employment in the short run.

This thesis studies the effects of monetary policy on liquidity risk. I extend the model of financial intermediation developed by Diamond and Dybvig (1983) to include a monetary authority. Through the lens of different versions of this model, I study the effects of negative interest on reserves, of payment of positive interest on reserves and of a large central-bank balance sheet. In the first essay, I study optimal monetary policy in the model's liquidity trap. I find that a negative interest on reserves is effectively a tax on the banking system. As such, it leads to less effective financial intermediation and therefore increases liquidity risk. On the other hand, it also acts as a tax on saving and therefore has the effect of boosting aggregate demand. I find that in the liquidity trap, when aggregate demand is insufficient to absorb the economy's full productive capacity, it is optimal for the central bank to set a strictly negative interest on bank reserves. The second essay adds financial markets to the model. Banks faced with competition for savings from financial markets are unable to fully insure depositors' liquidity risk. In this setting, I ask whether appropriate monetary policy can improve the economy's equilibrium outcome. I find that paying a positive interest on bank reserves is welfare improving. There exists a strictly positive level of interest on reserves that implements the economy's efficient allocation. In the last essay, I make the model's term structure of interest rates endogenous. I find that the central bank can control the term premium by varying the size of its balance sheet. In particular, issuing bank reserves lowers the return on long-term assets. I show that in this setting optimal monetary policy requires a large central-bank balance sheet.