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.

We re-visit three classical models in information economics. The first chapter studies the screening problem for a seller who owns a single good, and a buyer whose valuation for the good is their private information. We allow for the seller to acquire information at some cost about the buyer's value, in addition to her choice over the probability of trade and the transfer. The seller thus chooses a Blackwell experiment for each announcement that the buyer makes in a direct revelation mechanism. More informative experiments are more costly. Under mild conditions, there are always optimal mechanisms where the seller acquires coarse information about the buyer. In particular, it is always optimal for the seller to choose an experiment that consists of no more than four signals. When the buyer has only two possible values, the same holds for experiments that consist of at most three signals. The second chapter examines information disclosure in a setting of strategic experimentation. A group of agents continuously and independently choose between a safe arm and risky arms of the same type. When the arms reveal good news, we are able to achieve efficiency in a class of simple information disclosure mechanisms when the agents are initially optimistic enough about their risky arms, but only when there are not too many agents. When the reverse is true, the mechanism must be transparent. Thus, there is a tradeoff between transparency and efficiency. This tradeoff does not exist in the case of bad news. In the final chapter, we borrow insights from social learning theory to understand why institutions have persistent effects. We adapt the classical model in a minimal fashion to accommodate a role for institutions, and demonstrate that social learning is one plausible mechanism of persistence.

This thesis consists of three papers in the broad field of Applied Economics. I focus on three "soft factors", namely, face-to-face communication, brief social interactions and information updates. I study on how they affect individual and organisational outcomes using different natural experiments. The first chapter provides causal evidence on how the ability to communicate face-to-face (in addition to electronic communication) can increase organisational performance. The study exploits a natural experiment within a large organisation where workers must communicate electronically with their teammates. A computerized system allocates the tasks to workers creating exogenous variation in the co-location of teammates. Workers who share the same room, can also communicate in person. The main findings are that face-to-face communication increases productivity and that this effect significantly varies across tasks, team characteristics and working environments. In the second chapter I construct a novel dataset of immigrants and ships arrived to the US in the early 20th century to study the effects of brief social interactions and their persistence over time. The chapter shows that individuals travelling (during few days) with shipmates that have better connections in the US, have higher quality jobs. Several findings are consistent with the mechanism whereby individuals get information or access to job opportunities from their shipmates. The study highlights the importance of social interactions with unknown individuals during critical life junctures. It also suggests that they are more relevant for individuals with poor access to information or weak social networks. The third chapter shows that executions cause a local and temporary reduction in serious violent crime. The interpretation of this result follows from a theoretical framework connecting information updates with the increasing 'awareness' of individuals about the consequences of crime. Consistently with the predictions of the model, the study finds that effects are stronger when media attention is high and lower in places with high propensity to apply the death penalty.

This thesis examines the contributions of three major figures in heterodox economic thought - Thorstein Veblen, Joan Robinson and Michał Kalecki - to the identification of what Else Oyen describes as ‘poverty producing processes’. It is argued that to date no distinct heterodox theory of the causes and consequences of poverty exists. This is surprising, not least because questions of social power, asymmetrical access to resources, and inequality are among the core themes in heterodox thought. This thesis demonstrates that Robinson, Kalecki and Veblen have devoted considerable time and effort to the investigation of poverty-related issues. Combined, they have discussed four key processes that contribute to poverty production: conspicuous consumption, mark-up pricing, industrial sabotage and hegemonic policy-making. This thesis suggests that these four core processes amount to a distinct heterodox perspective on poverty production, and may serve as a basis for a comprehensive enquiry into the causes of poverty in advanced capitalism. Being in essence a history of economic thought analysis of post-Keynesian and institutionalist theorising on poverty, this thesis contributes to economic poverty research, the history of economic thought and the development of an integrated heterodox approach.

We apply regime-switching models to study the dynamic switching behaviour of equity risk premia. Traditionally, equity risk premia have been estimated assuming a single regime exists. Regime-switching models allow for the existence of two, or more, regimes. Three regime-switching models are employed: structural break models, threshold models and Markov regime-switching models. Both structural break models and threshold models assume that the switching mechanism is deterministic. The former allow for only a single break and the state variable is solely determined by time. Under the latter, multiple changes are allowed and the state variable is determined by an observable variable with respect to an unobserved threshold. In Markov regime-switching models, equity risk premia are allowed to switch probabilistically for each observation. This is achieved by introducing a state variable which is governed by a Markov process. To capture the co-movements among financial variables, we extend regime-switching models to a VAR framework, employing threshold autoregressive vector models and Markov regime-switching vector models. We estimate models of UK equity risk premia conditionally on the state variable which is related to business conditions. The results of non-linearity tests favour regime-switching models and suggest that regime-switching is an important characteristic of UK equity risk premia.

Asset prices offer useful information for monetary policymakers in the short-term, yet their significant relationship to primary policy-indicators is debated. In one view bubbles are difficult to recognise and central banks should act just against the adverse consequences of their unwinding. The opposite view advocates ‘pre-emptive’ monetary policy as financial imbalances accumulate aiming to forestall such consequences. After reviewing the debate, we evaluate ‘pre-emptive’ monetary policy when financial stability is an explicit objective replacing the output-gap. Modelling a game between a central bank and the financial sector similar to Barro and Gordon (1983), we examine monetary policy under commitment and discretion. In contrast to the relevant literature, we conclude that pre-emptive monetary policy succeeds in better controlling inflation, anchoring inflation expectations and imposing more discipline to the financial sector when committed to a rule. The model is extended to incorporate incomplete information about the policy objectives. We evaluate the effect of vagueness about the central bank’s preferences for financial stability in the behaviour of the central bank and the financial sector, and how reputation-building affects the conduct of discretionary policy. Finally, we discuss the relevance of our conclusions in the light of the global financial crisis initiated in August 2007.