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by Wong Tak Chuen. / Thesis (M.Phil.)--Chinese University of Hong Kong, 1999. / Includes bibliographical references (leaves 106-108). / Abstracts in English and Chinese. / ACKNOWLEDGMENT --- p.iii / LIST OF TABLES --- p.iv / LIST OF ILLUSTRATION --- p.v / CHAPTER / Chapter ONE --- INTRODUCTION --- p.1 / Chapter TWO --- THE LITERATURE REVIEW --- p.2 / Chapter THREE --- METHODOLOGY --- p.8 / Error Correction Model / Unit-Root Tests / Cointegration Tests / Structural Break Test / Chapter FOUR --- MODEL SPECIFICATION AND SIMULATION --- p.19 / Chapter FIVE --- SIMULATION ANALYSIS --- p.45 / Chapter SIX --- CONCLUSION --- p.51 / TABLES --- p.53 / ILLUSTRATIONS --- p.67 / APPENDIX --- p.81 / Chapter A --- THE ESTIMATED MODEL / Chapter B --- DATA DESCRIPTION / BIBLIOGRAPHY --- p.109

Sun, Wu. / Thesis (M.Phil.)--Chinese University of Hong Kong, 2008. / Includes bibliographical references (leaves 43-45). / Abstracts in English and Chinese. / Abstract --- p.I / 摘要 --- p.II / Acknowledgments --- p.III / Chapter Essay 1. --- The Effect of Impatience on Determinacy --- p.1 / Chapter 1.1 --- Introduction --- p.1 / Chapter 1.2 --- The model --- p.2 / Chapter 1.3 --- Conclusion --- p.8 / Chapter Essay 2. --- Determinacy under Non-separable Utility --- p.9 / Chapter 2.1 --- Introduction --- p.9 / Chapter 2.2 --- The basic model --- p.10 / Chapter 2.3 --- Conclusion --- p.21 / Chapter Essay 3. --- Determinacy under Calvo-Style Sticky Price Model --- p.23 / Chapter 3.1 --- Introduction --- p.23 / Chapter 3.2 --- The model --- p.24 / Chapter 3.2.1 --- With staggered price only --- p.24 / Chapter 3.2.2 --- Incorporating firm-specific capital --- p.30 / Chapter 3.2.3 --- Incorporating staggered wages --- p.35 / Chapter 3.3 --- Conclusion --- p.41 / Reference --- p.43 / Appendix --- p.46 / Table 1: Baseline Calibration --- p.46 / Table 2: Baseline Calibration --- p.46

This dissertation contains a series of essays that provide empirical evidence for Australia on some fundamental predictions of real business cycle models and on the convergence and persistence of real interest rates. Chapter 1 provides a brief introduction to the issues examined in each chapter and provides an overview of the methodologies that are used. Tests of various basic predictions of standard real business cycle models for Australia are presented in Chapters 2, 3 and 4. Chapter 2 considers the question of great ratios for Australia. These are ratios of macroeconomic variables that are predicted by standard models to be stationary in the steady state. Using time series econometric techniques (unit root tests and cointegration tests) Australia great ratios are examined. In Chapter 3 a more restrictive implication of real business cycle models than the existence of great ratios is considered. Following the methodology proposed by Canova, Finn and Pagan (1994) the equilibrium decision rules for some standard real business cycle are tested on Australian data. The final essay on this topic is presented in Chapter 4. In this chapter a large-country, small-country is used to try and understand the reason for the sharp rise in Australia??s share of world output that began around 1990. Chapter 5 discusses real interest rate linkages in the Pacific Basin region. Vector autoregressive models and bootstrap methods are adopted to study financial linkages between East Asian markets, Japan and US. Given the apparent non-stationarity of real interest rates a related issue is examined in Chapter 6, viz. the persistence of international real interest rates and estimation of their half-life. Half-life is selected as a means of measuring persistence of real rates. Bootstrap methods are employed to overcome small sample issues in the estimation and a non-standard statistical inference methodology (Highest Density Regions) is adopted. Chapter 7 reapplies the High Density Regions methodology and bootstrap half-life estimation to the data used in Chapters 2 and 5. This provides a robustness check on the results of standard unit root tests that were applied to the data in those chapters. Main findings of the thesis are as follows. The long run implications of real business cycle models are largely rejected by the Australia data. This finding holds for both the existence of great ratios and when the explicit decision rules are employed. When the small open economy features of the Australian economy are incorporated in a two country RBC model, a country-specific productivity boom seems to provide a possible explanation for the rise in Australia??s share of world output. The essays that examine real interest rates suggest the following results. Following the East Asian financial crisis in 1997-98 there appears to have been a decline in the importance of Japan in influencing developments in the Pacific Basin region. In addition there is evidence that following the crisis Korea??s financial market became less insular and more integrated with the US. Finally results obtained from the half-life estimators suggest that despite the usual findings from unit root tests, real interest rates may in fact exhibit mean-reversion.

This dissertation contains a series of essays that provide empirical evidence for Australia on some fundamental predictions of real business cycle models and on the convergence and persistence of real interest rates. Chapter 1 provides a brief introduction to the issues examined in each chapter and provides an overview of the methodologies that are used. Tests of various basic predictions of standard real business cycle models for Australia are presented in Chapters 2, 3 and 4. Chapter 2 considers the question of great ratios for Australia. These are ratios of macroeconomic variables that are predicted by standard models to be stationary in the steady state. Using time series econometric techniques (unit root tests and cointegration tests) Australia great ratios are examined. In Chapter 3 a more restrictive implication of real business cycle models than the existence of great ratios is considered. Following the methodology proposed by Canova, Finn and Pagan (1994) the equilibrium decision rules for some standard real business cycle are tested on Australian data. The final essay on this topic is presented in Chapter 4. In this chapter a large-country, small-country is used to try and understand the reason for the sharp rise in Australia??s share of world output that began around 1990. Chapter 5 discusses real interest rate linkages in the Pacific Basin region. Vector autoregressive models and bootstrap methods are adopted to study financial linkages between East Asian markets, Japan and US. Given the apparent non-stationarity of real interest rates a related issue is examined in Chapter 6, viz. the persistence of international real interest rates and estimation of their half-life. Half-life is selected as a means of measuring persistence of real rates. Bootstrap methods are employed to overcome small sample issues in the estimation and a non-standard statistical inference methodology (Highest Density Regions) is adopted. Chapter 7 reapplies the High Density Regions methodology and bootstrap half-life estimation to the data used in Chapters 2 and 5. This provides a robustness check on the results of standard unit root tests that were applied to the data in those chapters. Main findings of the thesis are as follows. The long run implications of real business cycle models are largely rejected by the Australia data. This finding holds for both the existence of great ratios and when the explicit decision rules are employed. When the small open economy features of the Australian economy are incorporated in a two country RBC model, a country-specific productivity boom seems to provide a possible explanation for the rise in Australia??s share of world output. The essays that examine real interest rates suggest the following results. Following the East Asian financial crisis in 1997-98 there appears to have been a decline in the importance of Japan in influencing developments in the Pacific Basin region. In addition there is evidence that following the crisis Korea??s financial market became less insular and more integrated with the US. Finally results obtained from the half-life estimators suggest that despite the usual findings from unit root tests, real interest rates may in fact exhibit mean-reversion.

In chapter one, I examine the predictive content of subjective return expectations derived from price targets issued by equity analysts. Equity price targets are an ubiquitous feature of the financial information landscape, but it is not clear how informative they actually are. In this chapter, I show that the cross-section of price-target implied subjective return expectations contains rich informational content for forecasting returns. In-sample, I find that expected returns correlate strongly with average cross-sectional returns to a large panel of portfolios formed on the basis of observable firm characteristics. In out-of-sample exercises, forecasting models using subjective expectations are shown to offer more accurate predictions for portfolio returns than several other commonly employed, cross-sectional predictors, including the book-to-market and dividend-price ratios, momentum, and forward-looking cash-flow measures. Furthermore, these differences are shown to be economically relevant, with conditional portfolios formed on the basis of subjective expectations offering substantially improved risk-adjusted returns compared to many of the other predictors considered. The relative informational content, as well as the production by analysts, of subjective return expectations is found, however, to peak during recessions, with negligible predictive advantage discernible in expansions. In chapter two, my coauthors (Adam Rej, with CFM; David Thesmar, with MIT, CEPR, and NBER) and I empirically analyze a large panel of firm sales growth expectations. We find that the relationship between forecast errors and lagged revision is non-linear. Forecasters underreact to typical (positive or negative) news about future sales, but overreact to very significant news. To account for this non-linearity, we propose a simple framework, where (1) sales growth dynamics have a fat-tailed high frequency component and (2) forecasters use a simple linear rule. This framework qualitatively fits several additional features of data on sales growth dynamics, forecast errors, and stock returns. In chapter three, my coauthor (Ken Teoh, with Columbia) and I construct a novel text-based measure of firm-level attention to macroeconomic conditions and document that stocks associated with higher macroeconomic attention earn lower returns. Moving from the bottom decile to top decile of macroeconomic attention decreases a stock’s average return by 11.6\% per year. We propose a risk-based explanation in which stocks with higher macroeconomic attention contribute less idiosyncratic cash flow risk to the investor’s portfolio, hence earn lower expected returns. Decomposing the unexpected returns of macroeconomic attention-sorted portfolios into cash flow and discount rate news, we find that portfolios with higher macroeconomic attention stocks have lower cash flow risk.

Dissertation (PhD) -- University of Stellenbosch, 2000. / ENGLISH ABSTRACT: The Lucas critique states that if expectations are not explicitly dealt with, conventional econometric models are inappropriate for policy analyses, as their coefficients are not policy invariant. The inclusion of rational expectations in ·conventional model building has been the most common response to this critique. The concept of rational expectations has received several interpretations. In numerous studies, these expectations are associated with model consistent expectations in the sense that expectations and model solutions are identical. To derive a solution, these models require unique algorithms and assumptions regarding their terminal state, in particular when forward-looking expectations are present. An alternative that avoids these issues is the concept of weak rational expectations, which emphasises that expectation errors should not be systematic. Expectations are therefore formed on the basis of an underlying structure, but full knowledge of the model is not essential. The accommodation of this type of rational expectations is accomplished by means of an explicit specification of an expectations equation consistent with the macro econometric model's broad structure. The estimation of coefficients relating to expectations is achieved through an Instrumental Variable approach. In South Africa, monetary policy has been consistent and transparent in line with the recommendations of the De Kock Commission. This allows the modelling of the policy instrument of the South African Reserve Bank, i.e. the Bank rate, by means of a policy reaction function. Given this transparency in monetary policy, the accommodation of expectations of the Bank rate is essential in modelling the full impact of monetary policy and in avoiding the Lucas critique. This is accomplished through weak rational expectations, based on the reaction function of the Reserve Bank. The accommodation of expectations of a policy instrument also allows the modelling of anticipated and unanticipated policies as alternative assumptions regarding the expectations process can be made during simulations. Conventional econometric models emphasise the demand side of the economy, with equations focusing on private consumption, investment, exports and imports and possibly changes in inventories. In this study, particular emphasis in the model specification is also placed on the impact of monetary policy on government debt and debt servicing costs. Other dimensions of the model include the modelling of the money supply and balance of payments, short- and long-term interest rates, domestic prices, the exchange rate, the wage rate and employment as well as weakly rational expectations of inflation and the Bank rate. The model has been specified and estimated by usmg concepts such as cointegration and Error Correction modelling. Numerous tests, including the assessment of the Root Mean Square Percentage Error, have been employed to test the adequacy of the model. Similarly, tests are carried out to ensure weak rational expectations. Numerous simulations are carried out with the model and the results are compared to relevant alternative studies. The simulation results show that the reduction of inflation by means of only monetary policy could impose severe costs on the economy in terms of real sector volatility. / AFRIKAANSE OPSOMMING: Die Lucas-kritiek beweer dat konvensionele ekonometriese modelle nie gebruik kan word vir beleidsontleding nie, aangesien dit nie voorsiening maak vir die verandering in verwagtings wanneer beleidsaanpassings gemaak word nie. Die insluiting van rasionele verwagtinge in konvensionele ekonometriese modelle is die mees algemene reaksie op die Lukas-kritiek. Ten einde die praktiese insluiting van rasionele verwagtings III ekonometriese modelbou te vergemaklik, word in hierdie studie gebruik gemaak van sogenaamde "swak rasionele verwagtings", wat slegs vereis dat verwagtingsfoute me sistematies moet wees nie. Die beraming van die koëffisiënte van die verwagtingsveranderlikes word gedoen met behulp van die Instrumentele Veranderlikes-benadering. Monetêre beleid in Suid-Afrika was histories konsekwent en deursigtig in ooreenstemming met die aanbevelings van die De Kock Kommissie. Die beleidsinstrument van die Suid-Afrikaanse Reserwebank, naamlik die Bankkoers, kan gevolglik gemodelleer word met behulp van 'n beleidsreaksie-funksie. Ten einde die Lukas-kritiek te akkommodeer, moet verwagtings oor die Bankkoers egter ingesluit word wanneer die volle impak van monetêre beleid gemodelleer word. Dit word vermag met die insluiting van swak rasionele verwagtings, gebaseer op die reaksie-funksie van die Reserwebank. Sodoende kan die impak van verwagte en onverwagte beleidsaanpassings gesimuleer word. Konvensionele ekonometriese modelle beklemtoon die vraagkant van die ekonomie, met vergelykings vir verbruik, investering, invoere, uitvoere en moontlik die verandering in voorrade. In hierdie studie word daar ook klem geplaas op die impak van monetêre beleid op staatskuld en die koste van staatsskuld. Ander aspekte wat gemodelleer word, is die geldvoorraad en betalingsbalans, korttermyn- en langtermynrentekoerse, binnelandse pryse, die wisselkoers, loonkoerse en indiensneming, asook swak rasionele verwagtings van inflasie en die Bankkkoers. Die model is gespesifiseer en beraam met behulp van ko-integrasie en die gebruik van lang-en korttermynvergelykings. Die gebruiklike toetse is uitgevoer om die toereikendheid van die model te toets. Verskeie simulasies is uitgevoer met die model en die resultate is vergelyk met ander relevante studies. Die gevolgtrekking word gemaak dat die verlaging van inflasie deur alleenlik gebruik te maak van monetêre beleid 'n swaar las op die ekonomie kan lê in terme van volatiliteit in die reële sektor.

Thesis (PhD)--Stellenbosch University, 2014. / ENGLISH ABSTRACT: In the first essay of this thesis, a medium scale DSGE model is developed and estimated for the South African economy. When used for forecasting, the model is found to outperform private sector economists when forecasting CPI inflation, GDP growth and the policy rate over certain horizons. In the second essay, the benchmark DSGE model is extended to include the yield on South African 10-year government bonds. The model is then used to decompose the 10-year yield spread into (1) the structural shocks that contributed to its evolution during the inflation targeting regime of the South African Reserve Bank, as well as (2) an expected yield and a term premium. In addition, it is found that changes in the South African term premium may predict future real economic activity. Finally, the need for DSGE models to take account of financial frictions became apparent during the recent global financial crisis. As a result, the final essay incorporates a stylised banking sector into the benchmark DSGE model described above. The optimal response of the South African Reserve Bank to financial shocks is then analysed within the context of this structural model.

My dissertation within monetary macroeconomics focuses on uncovering the impact of micro level heterogeneity in household wealth portfolios and firm size on aggregate macroeconomic variables. Using household- and firm-level datasets, I study these outcomes in the context of exploring the effects of monetary policy shocks. Most macroeconomic models use a representative agent framework to study the effects of monetary policy. In such models all consumers are assumed to be similar, therefore, it is only required to know the size of the monetary policy shock and its average impact to estimate the overall effect. But recent literature has emphasized the importance of agent heterogeneity for explaining observed aggregate dynamics and optimal policy design. Here, it matters which consumers get the extra income as people react differently to the shock. In a model with a realistically calibrated household balance sheet, monetary policy has redistribution effects because different agents have differential exposure to the interest rate and inflation risk born in their portfolios. For example, short-term or nominal borrowers will win from a sudden decrease in the interest rate and a sudden increase in inflation, while short-term lenders or nominal lenders will lose. In the first chapter of the dissertation, co authored with Anastasia Burya, we study the effect of heterogeneity in consumers' portfolios on the unemployment response to monetary policy. We develop a search efforts model with heterogeneous agents and then decompose the effect of the monetary policy shock on aggregate unemployment. The direction and the magnitude of the wealth effect will determine whether people search for jobs more actively after a monetary contraction. For example, if unemployed consumers are indebted, they experience a negative wealth effect after a contraction, search for jobs more actively and increase their probability of finding a job, therefore, reducing unemployment. In this framework, the sign of the overall effect of monetary policy on unemployment will depend on whether unemployed consumers are indebted and the magnitude of their debt. We test the prediction of the model in both micro and aggregate data. To test the prediction of the model in the micro data using the PSID panel dataset, we estimate the coefficient of the interaction term between various mortgage measures and Romer \& Romer monetary policy shocks while looking at five main transition probabilities that indicate a higher increase in search efforts for indebted people after a monetary contraction: dynamic transition probability of moving from non employment to employment, moving from non participation in the labor force to employment, remaining a non participant in the labor force, remaining unemployed and taking up an extra job. In the aggregate data, we use a similar estimation approach with debt to income ratio. We also subject this to a variety of checks using age and Saiz instruments for increased robustness. In the second chapter of the dissertation, co-authored with Anastasia Burya and Martsella Davitaya, we show that inflation expectations are anchored. If inflation expectations are anchored, then their sensitivity to monetary policy should be smaller than if they are de-anchored. When the Fed pursues inflation targeting, the market expectations of Fed's reaction should affect the response to current monetary policy shocks. We use daily bond yield data to show that the sensitivity of inflation expectations to monetary policy is lower if the Fed is more responsive to inflation during the previous CPI release. Intuitively, the Fed announcement leading to a rate change that is higher than expected from the CPI release indicates that the markets expect the Fed to react more aggressively in the future. Therefore, markets do not adjust inflation expectations as much (leading to anchored inflation expectations). The empirical strategy consists of two steps. First, we measure market expectations about the Fed's reaction to inflation by regressing the changes of different interest rates around the CPI release dates on the surprise change in CPI. Second, we estimate the sensitivity of inflation expectations' response to monetary policy based on the expectations about the Fed's reaction to inflation. Product markets are characterized by the significant heterogeneity of demand elasticity between large and small firms. In many cases, the ability of larger firms to dictate prices is such that they are able to charge higher markups. In the third chapter, co-authored with Anastasia Burya, we develop a simple model of firms with heterogeneous market power. We connect the recent trend of increasing market power to the flattening of the Phillips Curve through the decreasing aggregate pass-through. We explore the sufficient statistic arising from this model and then proceed to estimate it in the data. Here, we consider heterogeneity in demand elasticity and superelasticity. In the recent literature as well, papers such as Baqaee, Farhi and Sangani (2021) and Wang and Werning (2020) have brought to attention that certain parameters of demand are important for various macroeconomic dynamics such as the flattening of the Phillips Curve. It was also shown that the degree of these effects depends on the demand parameters, such as elasticity and superelasticity. We estimate these parameters in a novel format using an empirical procedure called Granular IV, which was first described in Gabaix and Koijen (2020) and makes use of the fact that in reality, unlike baseline macroeconomic models, some firms are big enough to impact the aggregates. For this estimation, we use firm-level price data from ACNielsen Retail Scanner database. Employing the novel empirical approach we estimate these relevant demand parameters. We estimate a demand elasticity of 3.23, in line with the literature. Our estimate for super elasticity is 3.74 which is in line with Marshall's second law of demand and for constant superelasticity parametrisation would signify the curvature of the demand curve between that of CES and linear demand.

In this thesis, extensive research regarding the relationship between macroeconomic variables and the stock market is carried out. For this purpose the two largest stock markets in the world, namely the US and Japan, are chosen. As a proxy for the US stock market we use the S&P500 and for Japan the Nikkei225. Although there are many empirical investigations of the US stock market, Japan has lagged behind. Especially the severe boom and bust sequence in Japan is unique in the developed world in recent economic history and it is important to shed more light on the causes of this development. First, we investigate the long-run relationship between selected macroeconomic variables and the stock market in a cointegration framework. As expected, we can support existing findings in the US, whereas Japan does not follow the same relationships as the US. Further econometric analysis reveals a structural break in Japan in the early 1990s. Before that break, the long-run relationship is comparable to the US, whereas after the break this relationship breaks down. We believe that a liquidity trap in a deflationary environment might have caused the normal relationship to break down. Secondly, we increase the variable set and apply a non-linear estimation technique to investigate non-linear behaviour between macroeconomic variables and the stock market. We find the non-linear models to have better in and out of sample performance than the appropriate linear models. Thirdly, we test a particular non-linear model of noise traders that interact with arbitrage traders in the dividend yield for the US and Japanese stock market. A two-regime switching model is supported with an inner random or momentum regime and an outer mean reversion regime. Overall, we recommend investors and policymakers to be aware that a liquidity trap in a deflationary environment could also cause severe downturn in the US if appropriate measures are not implemented accordingly.