In the second chapter, we consider a mechanism of unstable fluctuations of aggregate investments by means of a global game approach. For this purpose, we extended a static global game to a dynamic one and paid attention to the effect of past aggregate investments on current profitability. Once this effect of aggregate investments between periods is taken into account, we can show that firms’ equilibrium strategies of investments become highly volatile over time. Moreover, long persistence of high or low economic activity can be explained by this model as well. The third chapter examines the effect of firms’ funding liquidity on macroeconomic dynamics and the role of liquidity markets. Here, we regard liquidity as firms’ accumulated net worth and introduce heterogeneity between firms with regard to their productivities and accumulation of their net worth. From our analysis, we show that under existence of externality between probabilities of liquidity shocks 1) the economy without liquidity markets is highly volatile. 2) Liquidity markets insulate the economy from liquidity shocks. 3) During an unstable economic environment, the economic activity can sharply drop in the existence of liquidity markets. The fourth chapter aims at showing risk shifting behaviour of financial intermediaries in the context of an economic growth model to analyze financial crises. In the low capitalized economy in which a rate of return on safe assets is high and households’ assets are scarce, investing in corporate sectors is more profitable than that of risky assets because the option value from investing in risky assets is low. However, as the economy grows, the rate of return on safe assets is decreasing whereas individual assets are increasing. In this situation, the option values of risky assets are increasing, which gives banks incentive to invest in risky assets leading some of the banks to be insolvent.

This thesis examines the sources of business cycle fluctuations in a developing Sub-Saharan African economy. We develop an open economy dynamic stochastic general equilibrium model (DSGE), which is log-linearized, calibrated, and estimated with Bayesian techniques using South Africa macroeconomic data. The model incorporates various features such as external habit formation, internal investment adjustment cost, variable capacity utilization, domestically produced goods prices and wages stickiness, incomplete exchange rate pass-through, and financial accelerator. The DSGE model also integrates seven orthogonal structural shocks: a financial market shock that affects both the premium on the assets held by households and the foreign interest rate, a cost-push shock, a productivity shock in the domestically produced goods sector, an export demand shock, a terms of trade shock, a government spending shock, and a monetary policy shock. The introduction of those structural shocks allows for an empirical investigation of their effects and contributions to business cycle fluctuations in the South African economy. Simulating the DSGE model and decomposing the forecast error variances of the observable macroeconomic variables, it emerges that the main driving forces of the growth rates of real GDP, consumption, and investment, as well as the trade balance to GDP ratio, are the export demand shock, the government spending shock, the terms of trade shock, and the productivity shock. The productivity, the price mark-up, and the terms of trade shocks drive the aggregate inflation. The financial market shock predominantly impels the domestic interest rate, while the monetary policy shock largely causes the exchange rate fluctuations. Real, nominal, and financial frictions are necessary to capture the dynamic of the South Africa macroeconomic data and critical to explain their volatility and persistence.

This thesis which compromise of three essays focuses on the theme of valuation, value premium anomaly, financing behaviour and emerging markets. The first essay studies the value growth puzzle in the context of conflict of interest between taxable and institutional investors. We model this conflict in a rational expectations framework and demonstrate how the differences in firm's characteristics (in terms of value versus growth) and the risk profile of the investors can explain the shape of CAPM's frontier in the overall economy without involving the beta parameter. We also explicate that the changes in taxable and non-taxable investors profile in a dynamic environment rationalize the value growth premium as illustrated by Malkiel (2003). Finally, our approach shed light on the issues raised by Shiller (1979,1981) and LeRoy and Porter (1981) that stock [bond] prices are too volatile to be rationalized by the discounted value of their expected dividends [coupon payments]. The second essay studies value anomaly in the context of four major emerging economies (i.e. Brazil, Turkey, China and India denoted by the acronym BTIC) with vast economic potential and Malaysia, a small emerging economy with top heavy, closely held, state-owned institutional setting. We attribute the anomaly to the investment pattern of glamour firms. Our empirical analysis illustrates that these firms have a tendency to hoard cash, delaying the undertaking of their growth options, especially in poor economic environments. This mitigates their business risk, but lowers their market valuation, driving down their returns. Our hypothesis also reconciles the diverging views stemming from both the neoclassical and behavioural perspectives. This third essay examines the target capital structure of Malaysian firms and their adjustment process in the pre- and post- Asian financial crisis. We utilize an unbalanced panel data set comprising of 184 firms and employ the Generalized Method of Moments (GMM) to study the relationship between a firm's characteristics and its capital structure targeting behaviour in the context of political patronage. Our results support the amalgamation of the well-known Pecking Order and Static Trade-off theories. It also illustrates that the financial crisis had a significant impact on the financial policy of Malaysian firms.

This thesis presents an experimental investigation of free riding behaviour and, more particularly, individual responses to it using, as a workhorse, the so called public goods game. This game starkly isolates the conflict between private and collective interest, providing us with a simple measure of the extent of free riding behaviour. The unifying theme of the thesis is elicitation and analysis of different indicators for how subjects perceive free riding under a number of treatment manipulations. Chapter 2 explores how people judge the morality of free riding in a public goods game by eliciting people's moral evaluations in hypothetical scenarios. The scenarios differed with respect to the framing of the game, the order of moves, and the behaviour of the non-judged player. Our findings suggest that free riding is perceived as morally reprehensible, except when the free rider moves second after observing that the other player free rode as well. We also find that moral judgments depend on others' behaviour, on framing and on the order of moves. Chapter 3 analyses the effect of framing on social preferences, as measured by self- reported emotions and punishment. Our findings are that, for a given pattern of contributions, neither punishment nor emotion depends on our framing manipulation. Chapter 4 assesses the behavioural consequences of unfair punishment. In this experiment, we generate an unfair environment by assigning punishment to all group members, irrespective of their first stage behaviour, We find that, although unfair punishment causes a different time profile of contributions, contributions are, on average, little different from in the standard punishment game; and the assignment of punishment in the latter is unaffected by experience of an environment with unfair punishment. However, a history of unfair punishment causes different reactions to helping behaviour and punishment received, respectively.

This thesis consists of three essays on behaviour under risk. First, I investigate experimentally three related questions: (1) the effects of small-scale changes in wealth on risk attitudes; (2) whether potential changes in risk attitudes induced by such wealth increment are affected by (a) by the span of time this small-scale change in wealth has been anticipated for, and (b) the form taken by the wealth increment. There are three major results. One, whether risk attitudes are affected by a small-scale change in wealth depends on the form taken by the wealth increment. Two, that failure in replicating "house" money effect suggests that people may treat windfall money differently from earned money. Three, that the attitudes to risk are stable over the span of time we investigate. Second, I investigate how cognitive ability relates to consistency of behaviour under risk. Individual behaviour can be consistent in several forms. I find that individuals with higher cognitive ability display more consistent behaviour - in terms of choice and displayed type of risk preferences. Yet, in contrast to some recent studies, I find that individual measures of attitudes toward risk are not associated with cognitive ability. Third, I investigate the efficacy of a punishment mechanism in promoting cooperative behaviour in a public goods game when enforcement of punishment is uncertain. Numerous experimental studies have found that a sanctioning system can promote cooperative behaviour. But they rely on perfect enforcement of punishment. I find that a sanctioning system can no longer promote cooperative behaviour in a public goods game when punishment enforcement is a low-probability event.

The objective of this study is to examine the motives that drive the propensity of households to save and households' portfolio allocation decisions. This interest has been spurred by the issue of low personal saving rates that has been observed across the globe over the past two decades. In addition, the perplexities concerning portfolio allocation choices despite rapid innovations of financial products warrants the need for further investigation on household's asset allocation decisions. Motivated by the above phenomena, this study was conducted with three main objectives. First, the study sought to identify the factors that are instrumental to the formation of household's saving motives, by examining households' socio-demographic and behavioural factors that influence their motivations to save. Second, the study aimed to determine the factors that influence the household's propensity to save. Third, the study targeted to evaluate the factors that impact the choice of assets that households save in, by examining their preferences in regards to low-risk assets, risky assets, and life insurance. The 2004 U.S. Survey of Consumer Finances (SCF), which a government sponsored triennial cross-section survey on the financial situation of American families, was chosen as an empirical basis to address the three research objectives mentioned above. Various econometric tools were used to analyze the relationships under investigation. Results indicate that all categories of saving motives, namely the life-cycle, precautionary, bequest and profit motives are significant determinants of the propensity to save. This suggests that planned saving are relevant in the household's saving decisions. Nonetheless, results also show that unplanned saving, stemming from the household's capabilities and opportunities to save, is a stronger determinant of household saving. Saving motivations are also found to be related to portfolio allocation choice. In particular, life-cycle and profit motives significantly impinged on the decision to own risky assets, while life-cycle and bequest motives strongly influenced the probability of owning life insurance. Meanwhile, results indicate that age and income are salient factors influencing the household's formation of saving motives, their propensity to save, and portfolio allocation choices.

The ‘New Keynesian’ model assumes that prices and wages are in an extreme ‘sticky’pattern. In this model, the ssumption that a lagged indexation scheme increases the persistence of inflation is in widespread used; however, in reality, this ad hoc indexation setup is inconsistent with the real data. Moreover, there is extensive evidence on micro price data indicates that heterogeneity in price stickiness is a commonly found feature of price setting throughout the Euro area. Therefore, this thesis aims at incorporating this micro price evidence in an elaborated New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model by using a Generalised- Taylor-Economy (GTE) and Generalised-Calvo (GC) price settings. This thesis first presents the models, which are an extension of Smets-Wouters (SW) model (2003) which replaces Calvo with indexation price setting with heterogeneous price settings. In these new price settings, the micro evidence of heterogeneous price stickiness is directly emerged into macro DSGE models. The findings suggest that heterogeneous price stickiness can generate long-lived inflation and output persistence. Indirect inference is then used to evaluate the DSGE models of the French economy under different price settings. The results of the testing show that all models with differentprice settings are comprehensively rejected. The models are then estimated with Bayesian techniques as SW (2003) by using seven key macroeconomic observables. The results show that the GC model has the best performance. The rankings of the different price setting models are also proven to be robust to different priors and observables. Indirect inference evaluations are then conducted based on Bayesian estimated models, and all models are rejected. Indirect inference is then used as an estimation method. The testing results are improved on all models. The GC model is still considered to be the best performance model among all of the different price setting models.

Abstract This thesis makes three main contributions to the literature on Dynamic Stochastic General Equilibrium (DSGE) models in Macroeconomics. As no previous studies have studied the Chinese economy from the perspective of DSGE, the first contribution of this thesis is estimating a DSGE model for China through a Bayesian approach using the Chinese quarterly post-economic reform data representing the main macro-economic time series 1978.Q1-2007.Q4. Second, this thesis adopts a new method of evaluating macro-economic models in its evaluation of the estimated DSGE model for China. Rather than the classical methods used to evaluate a macro-economic model such as the Maximum Likelihood method, the method of Indirect Inference is used to test the DSGE model. This method differs from other methods in its adoption of a VAR as the auxiliary model that mimics reality. A hybrid model is adopted to improve the ability of the DSGE model to replicate real world results and compared to the original New Keynesian version of the DSGE model developed by Smets and Wouters. Third, considering the restrictions that the prior distribution imposed on the estimated parameters of the model in the Bayesian estimation, the estimation method of Indirect Inference is used in the last chapter of this thesis and compared with the Bayesian estimation. The results of the Bayesian estimation are in agreement with most of the existing literature on DSGE models. However, the results of Indirect Inference testing suggest that the adopted DSGE model does not closely resemble the real data, with a Hybrid model with 50% weight on the NK part performing significantly better. Indirect Inference estimation produces the same results and provides a better estimation of the model.

<p> In Chapter 1 I estimate economic returns to communist party membership in China. To overcome the problem of underreporting income, I propose a new method to impute family income based on the Engel rule. Using data from China Household Income Project, I find that for party member families the underreported family incomes, the difference between the imputed and reported income, are 27% and 17% of the reported incomes in 1995 and 2002 respectively, and that non-party member families do not underreport household incomes, consistent with the assumption. The estimated rates of return to party membership based on the imputed income are two-and-a-half to four times of those based on the reported income and are also substantially larger than the previous estimates reported in the economics literature.</p><p> In Chapter 2 I examine the impact of the New Rural Pension Scheme (NRPS) on the private transfer behavior of non-coresident adult children toward their elderly parents in rural China. Using data from the China Health and Retirement Longitudinal Survey and the regression discontinuity design and difference in difference method (RD-DiD), I find no evidence that pension payment from the NRPS program significantly crowds out economic support from adult children to their elderly parents. The heterogeneous effects at different income percentiles indicate that pension payment significantly increases the probability of receiving gross transfers, the net amount of transfers as well as the likelihood of positive net transfer for those elderlies with low income. The empirical findings suggest that the NRPS program is an effective tool for general poverty reduction and social protection for the targeted elderly population. </p><p> In Chapter 3 I examine how the commute time affects labor supply. The theoretical model I construct does not offer clear-cut predictions. Using data from the China Health and Nutrition Survey, I find that commute time has no effect on daily labor supply but has a negative effect on work days per week and weekly labor supply. These findings are different from those for Germany and Spain, and are potentially related to unique features of the labor supply and the labor market in China. Further, the effect of commute time on workdays per week is stronger for workers who change jobs and for high skill occupation workers who do not change jobs. The effects of commute time on labor supply do not differ between males and females.</p>

This thesis contains three chapters. The first two chapters concentrate on the sovereign debt market and study how domestic holdings of government debt and financial intermediation influence yields and equilibrium debt levels. An innovative perspective emerges from these studies: Sovereign default risk and government yields crucially depend on the size of domestic debt and on its influence on the domestic credit market. This perspective surpasses the traditional view that exclusively relates sovereign default risk to the size of external debt and the economic cycle. The third chapter empirically investigates the functioning of international capital markets and the behavior of market participants. The chapter studies how the different return components of aggregate equity and bond markets influence mutual fund flows and vice-versa. Two interesting results emerge. Firstly, the non-contemporaneous correlation between flows and returns is found to be predictable at least in the short run. This result rejects the standard perfect market assumption in macro-models which implies that the correlation between flows and returns is strictly contemporaneous. Secondly, evidence is found that excess returns in the equity markets are driven by cash-flow news. This is in contrast with the typical finding in the literature that discount rates news is the main driver of excess returns. Identifying determinants of government incentives to default is central to understand how equilibrium prices and quantities iare determined in sovereign debt markets. The scholarly literature has focused on two factors to explain default risk: the size of external debt and the fluctuation of the economic cycle. While these two dimensions are certainly important, another aspect seems equally important: the internal versus external composition of debt. Reinhart and Rogoff (2008) empirically investigate the importance of domestic debt for sovereign default episodes and conclude that there is a “forgotten history of domestic debt”. While domestic debt dynamics are relevant to understand sovereign default risk, very little research has been devoted to it. The first chapter of my thesis fills in the gap by incorporating domestic debt in a theoretical model of sovereign default. This extension leads to three contributions. The first is a positive one. While standard sovereign default models (i.e. Arellano, 2008 and Aguiar and Gopinath, 2006) assume exogenous output costs to default, the introduction of domestic debt allows me to illustrate an endogenous mechanism linking defaults and output contractions through the credit market which is consistent with the empirics. The second contributions is quantitative. The introduction of domestic debt helps to reproduce the high debt to GDP ratios and the low frequency of default that is found in the empirics. Finally the last contribution is normative. When domestic investors act competitively domestic debt levels are found to be inefficiently low. A case is made for the introduction of Pigouvian subsidies that subsidize domestic purchases of government debt. Sovereign defaults and banking crises tend to come in pairs. Understanding the link between these two phenomena is relevant to understand how the risk of sovereign default is priced by financial markets. In the second chapter of the thesis I focus on the underlying mechanisms of contagion between public debt and bank’s balance sheet. Using disaggregated banking data I analyze empirically the channels through which sovereign debt crises transmit to the banking sectors. I find that one of the main propagation mechanism operates through the collateral channel. When the default risk is high the price of government debt falls and the value of the asset that banks can pledge as a collateral on the wholesale market for liquidity contracts. Funding difficulties transmit thorough the balance sheet to the credit supply . The cyclicality of credit supply magnifies the negative impact of sovereign debt crises on output and consumption reducing the ex-ante incentives of issuing domestic debt. Lenders of last resort may mitigate the contraction of the credit supply in bad times offering liquidity in exchange for government debt. Following the monetary authority intervention the credit market recovers, sovereign yields fall and higher debt levels become sustainable. The third chapter studies the functioning of international equity and bond markets and the behavior of its participant. The chapter focuses on the interaction between different return components of aggregate equity and portfolio flows. First, international equity and bond market returns are decomposed into changes in expectations of future real cash payments, interest rates, exchange rates, and discount rates. News about future cash flows, rather than discount rates, is the main driver of international stock returns. This evidence is in contrast with the typical results reported only for the US. Inflation news instead is the main driver of international bond returns. Next, the interaction between these return components and international portfolio flows is analyzed. Evidence consistent with price action, short-term trend chasing, and short-run overreaction in the equity market is found. International bond flows to emerging markets are found to be more sensitive to interest rate shocks than equity flows.