This thesis aims to study the causes and effects of military expenditure on economic growth in India. Three aspects of this subject are concentrated which link well with the core stylised facts of the Indian defence effort and its developmental problems: the 'security dilemma' in terms of its relationship with its neighbour, Pakistan; the core factors that motivate the demand for defence; the economic impact of militarization and the effect of defence on development. First, the arms race between India and Pakistan is analyzed by using a Richardson action-reaction model and cointegration techniques. The empirical results provide robust evidence to support the existence of an enduring arms race between India and Pakistan, even after taking into account a structural break. Second, the results indicate that India's military expenditure is mainly determined by income, political status, the perceived threat from Pakistan and the external wars both in the long-run and in the short-run. Third, the relationship between military expenditure and economic growth is studied in India and in a broader context, i.e. in a cross-sectional and panel data study of 36 developing countries. The significant and negative effect of defence on economic growth is confirmed in both cases.

This thesis is concerned with macroeconomic and fiscal implications of fossil fuel combustion. Despite an emerging focus among economic policy makers on the problem of curbing greenhouse gas emissions, much remains to be learned about this complex issue. Fossil fuel related pollution, for example, is likely to impose a range of societal costs – including, potentially, on productivity, human health and household consumption patterns – which are typically not reflected in economic simulations aimed at informing the climate debate. Analysis of a broader set of potential energy-environmental spillovers here highlights new insights on the importance of theoretical assumptions, including in relation to savings behaviour, welfare aggregation and potential consumption externalities for the macroeconomy and fiscal policy. Distributional issues associated with potential energy tax reforms designed to control externalities and raise revenues are also studied in an effort to inform decision makers in the UK on the consequential risks - and mitigating strategies - to the well-being of societal groups, including lower income households.

This thesis consists of three chapters. The first chapter makes use of a New-Keynesian framework to analyze the effects of introducing the public sector in a small open economy, for which a different degree of home-bias for the private and the public sector will be assumed. Once it has been proven that this introduction does not fundamentally vary the original results of the Galí-Monacellli (2005) model, a sensitivity analysis of the effects of such introduction will be made in a setting with different exchange-rate regimes and different degrees of openness. The second chapter develops a DSGE model which features incomplete asset markets, domestic debt denominated either in domestic or foreign currency, a risk premium on such debt and simple feedback rules. We find that in this setting a positive government spending shock leads to expansionary effects on output when exchange rates are allowed to adjust. This effect is reinforced by the real depreciation caused by such policy especially in the case in which debt is denominated in foreign currency. This is not the case under fixed exchange rates, then also under a peg effects are, as expected, quite similar under both currency denominations of debt. The third chapter was written together with Stefan Niemann and Paul Pichler. In it fiscal policy is introduced into a sovereign debt model with endogenous default costs to examine the implications for the determination of the output costs of default. We find that the quantitative properties of the output costs of default, and their dependence on primitives such as the elasticity of labor supply, are distinctly different depending on the margin of fiscal adjustment. The consideration of fiscal policy thus has potentially important implications for the quantitative properties of models of sovereign debt and default.

Chapter One, A Forecast Rationality Test that Allows for Loss Function Asymmetries, proposes a new forecast rationality test that allows for asymmetric preferences without assuming any particular functional form for the forecaster's loss function. The construction of the test is based on the simple idea that under rationality, asymmetric preferences imply that the conditional bias of the forecast error is zero. The null hypothesis of forecast rationality under asymmetric loss (i.e. no conditional bias) is tested by constructing a Bierens [1982, 1990] conditional moment type test. Chapter Two, Global Identification Failure in DSGE Models and its Impact on Forecasting, considers the identification problem in DSGE models and its transfer to other objects of interest such as point forecasts. The results document that when observationally equivalent parameter points belong to the same model structure, the implied point forecasts are the same under both correct specification and misspecification. However, when analyzing the identification problem permitting models with different structures (e.g. different policy rules that produce sets of data dynamics that are quantitatively similar), the paper shows that indistinguishable parameter estimates can lead to distinct predictions. Chapter Three, Identification Robust Predictive Ability Testing, considers the predictive accuracy evaluation of models that are strongly identified in some part of the parameter space but non-identified or weakly identified in another part of the parameter space. The paper shows that when comparing the predictive ability of models that might be affected by identification deficiencies, the null distribution of out-of-sample predictive ability tests is not well approximated by the standard normal distribution. As a result, employing a standard (strong) identification critical value might lead to misleading inference. We propose methods to make the out-of-sample predictive ability tests robust to identification loss.

War has been one of the most destructive forms of interactive behaviour in the world. There has been a vast body of work that try to make better understand of the nature of war and its causes. The various types of inter- and intra-country conflict have received increasing attention by economists in the past few decades. The aim of this thesis is attempting to contribute to the study of conflict. Using a game-theoretic framework, we study the economic causes of inter- and intra-state conflict, and analyse the relationship between political regime and war. Our study reveals the possible mechanisms of conflict escalation by applying bargaining theory, and thus provides a new perspective for understanding the “democratic peace" hypothesis and the feasibility theory as important explanation for the onset of war.

This study considers the potential for the implementation of performance budgeting within the Maltese public sector, exploring the pressures which support and inhibit this reform, proposing a possible implementation approach and identifying the issues surrounding the implementation of changes to the budgetary system. The study also seeks to identify the recent reforms of the budgetary framework, which have occurred since the change in government in March 2013. Change is inevitable as the government is committed to meet specific targets for fiscal deficit and debt reduction, in line with its EU obligations. The research follows a qualitative approach, using data gathered from documentary sources, corroborated with empirical evidence collected from in-depth, semi-structured interviews. Access has been obtained to discuss relevant issues with senior politicians from the government and the opposition, including former ministers and Prime Ministers. The findings indicate that there are a number of macro-level and institutional pressures acting as triggers for the implementation of budgetary reform; at the same time, there are elements constituting resistance to change which have to be tackled should government intend to change the budgetary framework. A combined approach, with more emphasis on the bottom-up perspective, is recommended for the implementation of performance budgeting.

This thesis consists of four chapters. The first chapter explains the relevance of the research that has been undertaken and it contains an overview of this research for a general audience. The second chapter studies a multi-unit assignment with endogenous quotas in a dichotomous preference domain. The main conclusion I obtain is that pseudo-market mechanisms perform poorly in this type of environment. The third and fourth chapters use matching theory to understand segregation in matching environments ranging from integrating kidney exchanges platforms to the increase in interracial marriages after the popularization of online dating platforms. In both Chapters, using different formulations, I show under which conditions social integration can be obtained.

In this Ph.D. thesis, I study the role of inactive workers (i.e., individuals classified by standard statistical measures in the labour market as non-participants or as out-of-labour force) in the context of a frictional labour market model.

The thesis investigates to what extent external finance premium channels by amplifying the business cycle account for the economy turndown in the UK. It builds a DSGE model follows Smets and Woulters (2007), extends to incorprorate with the Bernanke Gertler and Gilchrist (1999) financial accelerator mechanisms and adjusts for an Armington (1969) version small open economy. We evaluate the model based on the calibration and re-estimate the model by Indirect Inference method using un-filtered nonstationary data in the period of 1975Q1 to 2015Q4 under the inflation targeting monetary policy regime. Although the model captures the counter cyclical feature of external finance premium proposed in most of the literatures, external finance premium shocks on the financial sector do not play a dominant role in explaining a recession. The main dominant effects of output fluctuations are still coming from the non-financial shocks, in particular, the non-stationary productivity shock and the labour supply shock.

In the first chapter we explore the relationship between income inequality and the Utilitarian ethic in a dynamic environment with endogenous preferences. Classical Utilitarians, like Bentham, believed that utilitarian principles are compatible with egalitarian ones. Although this claim is not uncontroversial, this relation holds for a utilitarian distribution of a given good among people, with identical concave utilities and exogenously set preferences. This idea breaks down if the preferences are different. In this paper we allow for endogenous preferences influenced by the existence of habits. We show how the inclusion of habit formation, studied in a dynamic environment, has egalitarian implications for a classical utilitarian distribution. Based on this result we are able to argue that Bentham’s positive views of decreasing inequality due to different consumption habits are consistent with his normative views regarding distribution. The second chapter explores the question of whether long-term income inequality consistent with equality of opportunity (EOp) ethic. In order to provide an answer we study the effectiveness of intergenerational EOp policies in an environment with two social groups and infinite generations of individuals, where the outcomes of one generation define the circumstances of the next. Circumstances in this paper have to do either with different preferences among individuals from different social groups or with both resources and preferences due to these resources. We show that in the former case EOp policies reduce inequality and also the EOp policy is the same as the Utilitarian one. In the latter case, inequality is not reduced and its level depends on the relative population of the two social groups. The third chapter studies an economy where privately informed hedge funds trade a risky asset in order to exploit potential mispricings. Hedge funds are allowed to have access to credit, by using their risky assets as collateral. We analyse the role of the degree of heterogeneity among hedge funds’s demand for the risky asset in the emergence of clustering of defaults. We find that fire-sales caused by margin calls is a necessary, yet not a sufficient condition for defaults to be clustered. We show that when the degree of heterogeneity is sufficiently high, poorly performing hedge funds are able to obtain a higher than usual market share at the end of the leverage cycle, which leads to an improvement of their performance. Consequently, their survival time is prolonged, increasing the probability of them remaining in operation until the downturn of the next leverage cycle. This leads to the increase of the probability of poorly and high-performing hedge funds to default in sync at a later time, and thus the probability of collective defaults.