This thesis asks the question, is there economic justification for two CARICOM countries forming a currency union? There is a theoretical component consisting of a dynamic stochastic general equilibrium (DSGE) model, and an empirical component utilizing vector autoregressions and cointegration analyses. More specifically, the reactions of two, small, open economies, to symmetric and asymmetric shocks, with and without a currency union, are investigated. Secondly, the demand and supply shocks between country pairs are examined to determine whether positive correlations exist. Thirdly, the thesis looks at the issue of economic convergence, especially given the coordinated efforts of CARICOM member states towards an environment conducive for a currency union. The theoretical results support the traditional view that countries with symmetric shocks are better candidates for a currency union, while those with asymmetric shocks are not. The empirical work supports the formation of currency unions for the following country pairs, Grenada-St. Kitts, Grenada-St. Vincent, Trinidad-Grenada, and Trinidad-St. Vincent. / Economics

Since 1960 national governments have increasingly found themselves in international trade disputes. Yet little research has attempted to analyze this important form of international conflict. The analysis of the U.S.-Japanese trade conflict shows that 11 significant commercial disputes occurred between 1968 and 1983, covering five industrial sectors. The outcomes varied in the degree to which each government achieved its initial objectives. This study proposes five hypotheses for explaining variations in bilateral conflict outcomes, and a technique for comparing outcomes is devised. Within the framework of the misalignment of the dollar-yen exchange rate and the resulting trade deficit, the pattern of variations is explained by the decline of the U.S. hegemony and the political influence of the domestic industries in the U.S. as well as in Japan on the outcomes of the trade conflicts. / M.A.

Thesis advisor: Rosen Valchev / I study how economic conditions and strategic incentives affect belief formation of rational agents with a limited information processing capacity. I study the impact of cognitive and information frictions on individual risk taking, investment and portfolio choice, and their implications on aggregate macroeconomic fluctuations. In my first chapter "Rational Overoptimism and Moral hazard in Credit Booms" I develop a framework in which over optimism in credit booms originates from rational decisions of managers. Because of moral hazard, managers pay too little attention to the aggregate conditions that generate risk, leading them to over borrow and over invest during booms. Periods of low risk premia predict higher default rates, higher probability of crises and systematic negative banks excess returns, in line with existing evidence. I document a negative relation between the convexity of CEO's compensation and their information on a larger sample of firms, which is consistent with my theory. My model implies that compensation regulation can play an important role in macro prudential policy. In my second chapter "Biased Surveys" Rosen Valchev and I improve on the standard tests for the FIRE hypothesis by allowing for both public and private information, and find new interesting results. First, we propose a new empirical strategy that can accommodate this richer information structure, and find that the true degree of information rigidity is about a third higher than previously estimated. Second, we find that individual forecasts over-react to private information but under-react to public information. We show that this is consistent with a theory of strategic diversification incentives in forecast reporting, where forecasters are rational but report a biased measure of their true expectations. This has two effects. First, it generates what looks like behavioral “over-reaction” in expectations, and second biases the information rigidity estimate further downward. Overall, our results caution against the use of survey of forecasts as a direct measure of expectations, and suggest that the true underlying beliefs are rational, but suffer from a much larger degree of imperfect information than previously thought. This has particularly profound implications for monetary policy, where inflation expectations play a key role. I explore further how economic incentives shape beliefs in my third chapter "International Trade and Portfolio Diversification". I show that information choice can explain the puzzling positive relation between bilateral investment and trade across countries. I present a model of endogenous information with both investment in assets and income from trade. While standard model of risk-hedging would require agents to invest in non-trading countries to diversify income risk, I show that limited information capacity and preferences for early resolution of uncertainty reverse this result. The intuition is that investors collect more information on trading partners to reduce income uncertainty, and therefore perceive their equity as less risky. I find that allowing for information choice reduces the role of risk hedging on portfolio decisions. I test my model’s implied relation between trade and attention in the data and find robust empirical support. / Thesis (PhD) — Boston College, 2022. / Submitted to: Boston College. Graduate School of Arts and Sciences. / Discipline: Economics.

Thesis (doctoral)--Université de Genève, 1980. / Includes bibliographical references (p. [443]-449).

The purpose of this study was to determine the effect on student learning from the sequence in which microeconomics and macroeconomics courses are taken. The sample for this study consisted of all students enrolled in 23 sections of Economics 1100 (Principles of Microeconomics) and 10 sections of Economics 1110 (Principles of Macroeconomics) during the fall semester, 1987, at the University of North Texas. The sample also consisted of all students enrolled in 14 sections of Economics 1100 and 12 sections of Economics 1110 during the spring semester, 1988, at the University of North Texas. The instruments chosen for use in measuring cognitive gains were two versions, each with 14 items, selected from the Joint council on Economic Educations's Revised Test of Understanding College Economics. Data were analyzed using hierarchical regression on five models. Each model used a different dependent variable to measure cognitive gain. The dependent variables were additive grade points, additive absolute improvement posttest scores, gap-closing posttest scores, microeconomic gap-closing scores and macroeconomic gap-closing posttest scores. The general hypothesis that students who complete microeconomics instruction followed by macroeconomics instruction have significantly higher cognitive gains than students who complete macroeconomics instruction followed by microeconomics instruction was not verified by the main effects. While the main effect of sequence was not significant, the interaction of sequence with previous high school economics was significant in the models using dependent variables of additive absolute improvement posttest score, gap-closing posttest score and microeconomic gap-closing posttest score. In addition, the interaction of sequence with previous college economics was significant on the dependent variable gap-closing posttest score. These findings seem to indicate that students who complete a sequence of macroeconomics followed by microeconomics with no previous exposure to economics have higher cognitive gains. In addition, students who complete a sequence of microeconomics followed by macroeconomics and had a previous college economics course have higher cognitive gain than students who complete the opposite sequence.

<p>In this thesis I explore dimensions through which changes in expectations can serve as a driver of business cycles in a rational expectations setting. Exploiting both the ``sunspot'' and ``news-shock'' approaches to expectations-driven business cycles, I use various theoretical models to investigate how changes in expectations may have played a role in macroeconomic events such as the technological revolution of the 1990's and the financial boom and bust of 2003-2008.</p> <p>In the first chapter, I explore the ability of a model with knowledge capital to generate business cycles driven by expectations of future movement in total factor productivity (TFP). I model knowledge capital as an input into production which is endogenously produced through a learning-by-doing process. When firms receive news of an impending productivity increase, the value of knowledge capital rises, inducing the firm to hire more hours to ``invest'' in knowledge capital. The rise in the value of knowledge capital immediately raises the value of the firm, causing an appreciation in stock prices. If the expected increase in productivity fails to materialize, the model generates a recession as well as a crash in the stock market.</p> <p>In the second chapter, I explore the extent to which expectations about innovations in the financial sector may have contributed to both the boom and bust associated with the ``Great Recession''. Making a connection between the ``boom-years'' of easy credit and the crises of 2008, I argue that agents' overly-optimistic expectations of the benefits associated with financial innovation led to a flood of liquidity in the financial sector, lowering interest rate spreads and facilitating the boom in asset prices and economic activity. When the events of 2007-2009 led to a re-evaluation of the effectiveness of these new products, agents revised their expectations regarding the actual efficiency gains available to the financial sector and this led to a withdrawal of liquidity from the financial system, a reversal in credit spreads and asset prices and a bust in real activity. Following the news-shock approach, I model the boom and bust cycle in terms of an expected future fall in the costs of bankruptcy which are eventually not realized. The build up in liquidity and economic activity in expectation of these efficiency gains is then abruptly reversed when agents' hopes are dashed. The model generates counter-cyclical movement in the spread between lending rates and the risk-free rate which is driven purely by expectations, even in the absence of any exogenous movement in bankruptcy costs as well as an endogenous rise and fall in asset prices and leverage.</p> <p>In the final chapter, I explore the extent to which a ``bout of optimism'' during a period of technological change such as the 1990's could produce not just a boom in consumption, investment and hours-worked, but also rapid growth in productivity itself. I present a theoretical model where the economy endogenously adopts the technological ideas of a slowly evolving technological frontier, and show that the presence of a ``technological gap'' between unadopted ideas and current productivity can lead to multiple equilibria and therefore the possibility that changes in beliefs can be self-fulfilling, often referred to as sunspots. In the model these sunspots take the form of beliefs about the value of adopting the new technological ideas, and unleash both a boom in aggregate quantities as well as eventual productivity growth, increasing the value of adoption and self-confirming the beliefs. In this sense, the model provides an alternative interpretation of the empirical news-based results that identify expectational booms that precede growth in TFP. Finally, I demonstrate that the scope for the indeterminacies is a function of the steady-state growth rate of the underlying frontier of technological ideas, and that during times of low growth in ideas or technological stagnation, the potential for indeterminacies and thus belief-driven productivity growth diminishes.</p> / Doctor of Philosophy (PhD)

<p>The aim of this thesis is to provide mathematical tools for an alternative to the mainstream study of macroeconomics with a focus on debt-driven dynamics.</p> <p>We start with a survey of the literature on formalizations of Minsky's Financial Instability Hypothesis in the context of stock-flow consistent models.</p> <p>We then study a family of macro-economical models that date back to the Goodwin model. In particular, we propose a stochastic extension where noise is introduced in the productivity. Besides proving existence and uniqueness of solutions, we show that orbits must loop around a specific point indefinitely.</p> <p>Subsequently, we analyze the Keen model, where private debt is introduced. We demonstrate that there are two key equilibrium points, intuitively denoted good and bad equilibria. Analytical stability analysis is followed by numerical study of the basin of attraction of the good equilibrium.</p> <p>Assuming low interest rate levels, we derive an approximate solution through perturbation techniques, which can be solved analytically. The zero order solution, in particular, is shown to converge to a limit cycle. The first order solution, on the other hand, is shown to explode, rendering its use dubious for long term assessments.</p> <p>Alternatively, we propose an extension of the Keen model that addresses the immediate completion time of investment projects. Using distributed time delays, we verify the existence of the key equilibrium points, good and bad, followed by their stability analysis. Through bifurcation theory, we verify the existence of limit cycles for certain mean completion times, which are absent in the original Keen model.</p> <p>Finally, we examine the Keen model under government intervention, where we introduce a general form for the government policy. Besides performing stability analysis, we prove several results concerning the persistence of both profits and employment. In economical terms, we demonstrate that when the government is responsive enough, total economic meltdowns are avoidable.</p> / Doctor of Philosophy (PhD)

Doctor of Philosophy / Department of Economics / Lance Bachmeier / In the first chapter I study the effects of oil price shocks on economic activity at the U.S. state-level, an innovative feature of this dissertation. States which rely more heavily on manufacturing or tourism are more adversely affected by adverse oil price shocks, while states which are major energy producers either benefit or experience insignificant economic changes from historically large oil price increases. Additionally, oil price increases from 1986 to 2011 have not impacted state-level economies to the same degree as increases from 1976 to 1985. This discrepancy can be attributed to a fundamental change in the structure of the U.S. economy, for example, a declining manufacturing sector or an increase in the efficiency with which energy is used in the production process. In the second chapter I explore the effects of alternative measures of energy price shocks on economic activity and examine the relative performance of these alternative measures in forecasting macroeconomic activity. The alternative energy prices I consider are: gasoline, diesel, natural gas, heating oil and electricity. I find that alternative measures of energy price shocks produce different patterns of impulse responses than oil price shocks. The overwhelming evidence indicates that alternative energy price models, excluding a model containing gasoline prices, outperforms the baseline model containing oil prices for many states, particularly at short-to-mid forecast horizons. In the third chapter, which is coauthored with Lance Bachmeier, we determine whether accounting for oil price endogeneity is important when predicting state-level economic activity. We find that accounting for endogeneity matters for in-sample fit for most states. Specifically, in-sample fit would be improved by using a larger model which contains both regular oil price and endogenous oil price movements. However, we conclude that accounting for endogeneity is not important for out-of-sample forecast accuracy, and a simple model containing only the change in the price of oil produces equally accurate forecasts. Accounting for endogeneity is particularly important in an environment in which rising oil prices were caused by a growing global economy, such as in the years 2004-2007.

<p>This dissertation addresses three key issues in international finance and economics: the uncovered interest rate parity puzzle in exchange rates, the home bias puzzle in portfolio allocations, and the surprising lack of correlation between terms of trade shocks and output in small open economies. </p><p>The first chapter shows that the much-studied Uncovered Interest Rate Parity (UIP) puzzle, the observation that exchange rates do not adjust sufficiently to offset interest rate differentials, is more complicated than commonly understood. I show that the puzzle changes nature with the horizon. I confirm existing short-run evidence that high interest rate currencies depreciate less than predicted by the interest rate differential. But, building on Engel (2012), at longer horizons (4 to 7 years) I find a reverse puzzle: high interest rate currencies depreciate too much. Interestingly, the long-horizon excess depreciation leads exchange rates to converge to the UIP benchmark over the long-run. To address the changing nature of the puzzle, I propose a novel model, based on the mechanism of bond convenience yields, that can explain both the short and the long horizon UIP violations. I also provide direct empirical evidence that supports the mechanism. </p><p>In chapter 2, I address the puzzling observation that portfolios are concentrated in asset classes which comove strongly with the non-financial income of investors. As an explanation, I propose a framework of endogenously generated information asymmetry, where rational agents optimally choose to focus their limited attention on risk factors that drive both their non-financial income and some of the risky asset payoffs. In turn, the agents concentrate their portfolios in assets driven by those endogenously familiar factors. I explore an uncertainty structure that implies decreasing returns to information, whereas the previous literature has focused on a setup with increasing returns. I show that the two frameworks have differing implications, which I test in the data and find support for decreasing returns to information. </p><p>In chapter 3, I address the puzzling lack of correlation between Terms of Trade (ToT) and the Small Open Economy (SOE) GDP. A SOE model typically relies on three sources of exogenous disturbances: world real interest rate, Terms of Trade (ToT) and technology. However, the empirical literature has failed to reach a consensus on the relative importance of the terms of trade as a driver of business cycles, with some papers claiming they are hugely important while others find no evidence of a relationship at all. Kehoe and Ruhl (2008) have recently shown that the weak empirical link between ToT and the GDP might be due to measurement limitations with the output series in an open economy framework. This paper merges data on national accounts with data on global trade flows for a panel of 31 countries and finds that Terms of Trade have a negligible effect on GDP but a strong effect on aggregate consumption. The evidence supports the hypothesis that ToT are important drivers of business cycles, but measurement issues with GDP obscure their relationship with real output. This further suggests that researchers should be careful when equating model output with measured GDP in an open economy setup.</p> / Dissertation

This study develops an economic methodology in which,behavioural laws (in the sense of necessary connections between cause and effect) play no essential role. Hayek and Menger are important sources of inspiration. Economic behaviour is explained by way of tendencies rather than laws and insight into economic phenomena is gained by laying bare their "action structure" in which behavioural explanation and behavioural laws play no role. This methodology is applied to the explanation of macroeconomic coordination. The appropriate equilibrium conditions are developed and the relevant tendencies away from or towards equilibrium are identified. The institutions responsible for these tendencies are identified and anarysed. In the light of these findings, pre-Keynesian macroeconomics, the macroeoconomics of Walrasian theory, as well as Keynes's General Theory itself are critically assessed. / Economics and Management Sciences / D. Comm. (Economics)