This thesis consists of two essays on economic fluctuations. The first essay (Chapter 2) explores the role of expectations in economic fluctuations. It does so within a cashless, monetary, and competitive economy featuring producers and consumers/workers with asymmetric information. Only workers observe current productivity and hence they perfectly anticipate prices, whereas all agents observe a noisy signal about long-run productivity. Information asymmetries imply that monetary policy and consumers' expectations have real effects. Non-fundamental, purely expectational shocks are conventionally thought of as demand shocks. While this remains a possibility, expectational shocks can also have the characteristics of supply shocks: if positive, they increase output and employment, and lower in flation. Whether expectational shocks manifest themselves as demand or supply shocks depends on the monetary policy pursued. Forward-looking policies generate multiple equilibria in which the role of consumers' expectations is arbitrary. Optimal policies restore the complete information equilibrium. They do so by manipulating prices so that producers correctly anticipate their revenue despite their uncertainty about current productivity. I design targets for forward-looking interest-rate rules which restore the complete information equilibrium for any policy parameters. In flation stabilization per se is typically suboptimal as it can at best eliminate uncertainty arising through prices. This offers a motivation for the Dual Mandate of central banks. The second essay (Chapter 3) shows that implementation cycles, introduced in Shleifer (1986) , are possible in the presence of capital and the absence of borrowing constraints. In a two-sector economy, patents on cost-saving ideas which take the form of investment-specific technological change arrive exogenously at a sequential, perfectly smooth rate: in odd-numbered periods, they reach a firm producing capital of type 1 and, in the even-numbered ones, a firm producing capital of type 2 . Firms can make profits out of these once. While the immediate appropriation (henceforth, "implementation") of patents is always a possibility, for accordingly formed expectations, firms can alternatively implement their patents simultaneously. This is because investment-specific technological change naturally introduces a one-period discrepancy between the time firms implement their patents and the time they receive revenue out of them. The implementation of a patent implies a sharp fall in investment which, in turn, causes a boom in current consumption. As a result, the consumption boom takes place before the wealth boom. This not only eliminates the need to smooth consumption away from the wealth boom to the period before it as conjectured, but, further, it implies that the interest rate paid when revenue is realized -and wealth expands- falls. Consequently, present discounted profits rise and implementation cycles can become a possibility. In a policy extension, I show that prolonging patent rights to two periods rules out "implementation cycles" and may lead to a welfare improvement.

This thesis is concerned with both mechanism design and political economy issues. The first chapter examines the conditions under which information aggregation (through an appropriately designed mechanism) can solve hidden-types (also commonly referred as adverse selection) problems. The remaining two chapters adopt a contract theory approach in order to explain prominent institutions of many contemporary political regimes. Chapter two provides a theory on why laws, which restrict the freedom of private parties to commit on certain transactions, may actually be beneficial for increasing social surplus and promoting economic growth and how the evolution of these laws interacts with the process of economic development. Finally, chapter three examines the issue on how the separation between the legislative and the executive branch of a government can complement political competition in order to achieve an efficient provision of public goods.

<p> Over the past two decades, hedge fund activism has emerged as a new mechanism of corporate governance that brings about operational, financial and governance reforms to a corporation. Many prominent business executives and legal scholars are convinced that the American economy will suffer unless hedge fund activism with its <i>perceived</i> short-termism agenda is significantly restricted. Shareholder activists and their proponents claim they function as a disciplinary mechanism to monitor management and are instrumental in mitigating the agency conflict between managers and shareholders. I find statistically meaningful empirical evidence to reject the anecdotal conventional wisdom that hedge fund activism is detrimental to the long term interests of companies and their long term shareholders. Moreover, my findings suggest that hedge funds generate <i>substantial long term</i> value for target firms and its long term shareholders when they function as a shareholder advocate to monitor management through active <i>board engagement.</i></p>

This thesis sets out the case and foundations for a new way to think about, and model, Macroeconomics. This framework aims to describe the fluctuations and differing growths of economies, not in terms of the choice and exchange of Microeconomics, but rather in terms of the enforcement relationships that allow that exchange and other cooperation between people. It first establishes just why this is necessary, with a thorough methodological critique of the way Macroeconomics is done right now. It then presents computational models of two presumably competing kinds of enforcement relationship. The first of these is the third party supervision that we are most familiar with as enforcement from every day life, and which has received some of the longest running philosophical discussion. This hierarchical model reproduces economic fluctuations, through occasional collapses of large parts of the hierarchy. To assess the scientific merit of this model on the terms of conventional Macroeconomics, I develop a compatible hypothesis testing strategy. The second kind of enforcement considered is what would commonly be called peer pressure. For this I derive a preliminary result, that would allow further development of an overarching research program.

This thesis is intended to be part of a vigorous debate currently going on in the international community of exchange rate regime, monetary policy and related core issues in East Asian economies. From different angles and aspects, this thesis contributes to the related literature, and provides fresh theoretical arguments and comprehensive study on the exchange rate regime and exchange rate performance in East Asia. This thesis firstly investigates the performance and characteristics of exchange rate regimes in a group of East Asian economies during the 1990s. The determination of local currency, the flexibility of exchange rate regime, as well as the regional coordination of exchange rate management have been thoroughly examined. This thesis then considers the implications of exchange rate regimes on the monetary policy. It examines whether the adoption of new exchange rate regime has affected monetary autonomy, concerning the sensitivity of domestic interest rates to international interest rates under different currency regimes, from the cases of the selected East Asian economies during 1994-2004. One of the aspects of the choices of exchange rate regime is its implications for the magnitude of exchange rate volatility and the transmission of this volatility into other countries in the region. This thesis thus carries out an empirical investigation on the exchange rate volatility and cross-country contagion/spillover effect within foreign exchange markets for a group of East Asian countries in the context of the 1997/98 financial crisis. In addition, this thesis provides an investigation on the measurement of foreign exchange market pressure and currency crisis proneness, as well as examines interrelations between exchange market pressure and monetary policy. The post-crisis interactions among EMP, domestic credit growth, and the interest rate differential between domestic and foreign interest rates, in particular, have been investigated for a representative group of East Asian countries. Finally, this thesis provides further evidence on the relationship between stock prices and exchange rates, from the typical case of Hong Kong, to realise what kind of causality prevailed over the period 1995-2001. Based on the high frequency weekly data, both long-run and short-run dynamics between stock prices and exchange rates in Hong Kong are addressed. Various forms of evidence and empirical techniques are extensively applied and fully evaluated for the specific questions addressed in this research. These practical methodologies include Ordinary Least Square (OLS), Generalised Method of Movements (GMM), Generalised Autoregressive Conditional Heteroskedasticity (GARCH), Exponential GARCH (EGARCH), Vector Autoregressions (VAR) and their Impulse Response Functions (IRF), Unit Root Tests, Cointegration, and Granger Causality Tests. All kinds of data sets and sample periods employed in this research provide an interesting comparison to the existing related studies. The main findings and key ideas drawn from this research have important implications for policy markers on the exchange rate management. The study on specific research topics and the comprehensive and thorough applications of various econometric methodologies provide valuable insight in characteristics and patterns of East Asian foreign exchange markets.

This thesis is composed by four chapters on New Keynesian macroeconomics. Chapter 1 develops a small New Keynesian model augmented with a steady state level of public debt and a share of rule-of-thumb consumers (ROTC henceforth) as in Galí et al. (2004; 2007). This chapter focuses on the consequences for the design of monetary and …scal rules, of the bifurcation on the demand side of the economy generated by the presence of ROTC, in the absence of Ricardian equivalence. When …scal policy follows a balanced budget rule, the share of ROTC determines whether an active and/or a passive monetary policy in the sense of Leeper (1991) guarantees determinacy. When a short run public debt asset is introduced, the amount of ROTC determines whether equilibrium determinacy requires a mix of active (passive) monetary policy and a passive (active) fiscal policy or a mix where both policies are active or passive. Chapter 2 studies the equilibrium determinacy of a New Keynesian model augmented with trend inflation, public debt and distortionary taxation. Both the level of long run inflation as well as the stock of steady state public debt have to be explicitly taken into consideration for the characterisation of the equilibrium dynamics between monetary and fiscal policy. Chapter 3 considers the implications of external habits for optimal monetary policy in an otherwise standard New Keynesian model, when those habits exist at the level of individual goods as in Ravn et al. (2006). External habits generate an additional distortion in the economy, which implies that the flex-price equilibrium will no longer be efficient and that policy faces interesting new trade-offs and potential stabilisation biases. The endogenous mark-up behaviour, which emerges with deep habits, signi…cantly a¤ects the optimal policy response to shocks and the stabilising properties of standard simple rules. Chapter 4 analyses both optimal monetary and …scal policy in a New Keynesian model augmented with deep habits and valuable government spending. We …find that, in line with the general consensus in the macro literature, …scal policy adds very little to optimal monetary policy as a stabilisation device.

published_or_final_version / Economics and Finance / Master / Master of Economics

In this thesis, we study the portfolio selection problem with multiple risky assets, linear transaction costs and a risk measure in a multi-period setting. In particular, we formulate the multi-period portfolio selection problem as a dynamic program and to solve it we construct approximate dynamic programming (ADP) algorithms, where we include Conditional-Value-at-Risk (CVaR) as a measure of risk, for different separable functional approximations of the value functions. We begin with the simple linear approximation which does not capture the nature of the portfolio selection problem since it ignores risk and leads to portfolios of only one asset. To improve it, we impose upper bound constraints on the holdings of the assets and we notice that we have more diversified portfolios. Then, we implement a piecewise linear approximation, for which we construct an update rule for the slopes of the approximate value functions that preserves concavity as well as the number of slopes. Unlike the simple linear approximation, in the piecewise linear approximation we notice that risk affects the composition of the selected portfolios. Further, unlike the linear approximation with upper bounds, here wealth flows naturally from one asset to another leading to diversified portfolios without us needing to impose any additional constraints on how much we can hold in each asset. For comparison, we consider existing portfolio selection methods, both myopic ones such as the equally weighted and a single-period portfolio models, and multi-period ones such as multistage stochastic programming. We perform extensive simulations using real-world equity data to evaluate the performance of all methods and compare all methods to a market Index. Computational results show that the piecewise linear ADP algorithm significantly outperforms the other methods as well as the market and runs in reasonable computational times. Comparative results of all methods are provided and some interesting conclusions are drawn especially when it comes to comparing the piecewise linear ADP algorithms with multistage stochastic programming.

This thesis considers estimation of discrete choice stationary dynamic games. Chapter 1 shows that when payoffs are linear in the parameters value functions are linear in the parameters and the equation system characterizing the Markovian equilibrium is linear in the parameters. This formulation allows us to estimate the model using Least Squares. We derive an optimal weight matrix for the Least Squares estimator and show that the efficient estimator is a Generalized Least Squares estimator. Chapter 2 shows that when time invariant unobservables are present the efficient estimator is a Generalized Fixed Effects estimator. Time invariant unobservables can be correlated with observed states. We do not need to impose any distributional assumption on time invariant unobservables. Our estimators have a closed form solution. In Chapter 3 we apply the framework developed in Chapters 1 and 2 to analyze the effects of the privatization of public banks on financial development. We build a dynamic entry game to analyze the Brazilian banking market. We show that profits of private banks are positively affected by the number of public branches operating in Brazilian isolated markets. The spill-over generated by public banks is quantified based on a dynamic oligopoly model. A counterfactual in which public banks are privatized is examined. It shows that the number of active branches operating in the long-run in a small market drops significantly.

The published papers and accompanying essay which constitute this doctoral thesis examine a number of key UK macroeconomic relationships using modern econometric methods. Aggregate labour demand and supply schedules are estimated on both inter-war and post-war UK data. The use of a consistent ntheoretical structure enables comparisons of parameter estimates to be made between the two periods. Labour participation data nare analysed by sex and age in the context of the retirement decision. The determination of multilateral exchange rates and UK imports are also investigated. In each area of application, the empirical model was identified using dynamic econometric methods and with the aid of various specification tests. In general, the resulting models offer a superior explanation of the relevant economic data than was previously available. In certain cases, this has implications for the conduct of national economic policy.