In this study, it is determined that excess returns on the OMX 30 are confirmed to rise in anticipation of monetary policy decisions made by the central banks of Sweden and The United States of America. Those findings were manifested at a greater magnitude on the first day prior to the announcements and on a statistically significant level one day prior to monetary policy decisions from the Federal Open Market Committee. Moreover, excess returns beyond the average rate were found to be substantially higher on the first and third day prior monetary policy decisions from the Swedish Central bank (Riksbanken) albeit not on a statistically significant level. The results drawn from the data in the study were reinforced by findings in similar tests conducted during times of global recession.

This thesis aims at contributing to the existing studies in the dynamic stochastic general equilibrium model, particularly in the new Keynesian models, on three aspects. It consists of three chapters. Chapter 2 is on “Dynamic new Keynesian Life-Cycle Model.” Chapter 3 is on “Re-thinking Price Stability in an Economy with Endogenous Firm Entry: Real Imperfections under Product Variety.” Chapter 4 is on “Growth Expectation.” Abstracts of each Chapter are as follows. In Chapter 2, we first construct a dynamic new Keynesian model that incorporates life-cycle behavior a la Gertler (1999), in order to study whether structural shocks to the economy have asymmetric effects on heterogeneous agents, namely workers and retirees. We also examine whether considerations of life-cycle and demographic structure alter the dynamic properties of the monetary business cycle model, specifically the degree of amplification in impulse responses. According to our simulation results, shocks indeed have asymmetric impacts on different households and the demographic structure does alter the size of responses against shocks by changing the trade-off between substitution and income effects. In Chapter 3, we re-think price stability in an economy with endogenous firm entry under possible distortions. We first demonstrate that endogenous entry causes real imperfections. Reflecting fluctuations in the number of varieties, the gap between the natural and the efficient level of output is no longer constant and variant to shocks. As a result, the central bank faces a trade-off between stabilizing inflation and welfare-relevant output gap. Then, we show that this results in the non-zero optimal rate of inflation. We further check whether welfare can be enhanced by targeting welfare-based inflation instead of cross-sectional average inflation contrary to the previous findings. Simulations even with such distortions as unknown natural interest rate or no fiscal remedy for efficient non-stochastic steady states, however, support cross-sectional average inflation targeting although there may exist some small gains by referring also to welfare-based inflation rates. Incomplete stabilization may enhance welfare in an economy when agents cannot internalize the externality on the love for variety. Chapter 4 is about the difficulty in producing reasonable business cycles for the expectation shock about higher future technology. For a long time, changes in expectations about the future have been thought to be significant sources of economic fluctuations, as argued by Pigou (1926). Although creating such an expectation-driven cycle (the Pigou cycle) in equilibrium business cycle models was considered to be a difficult challenge, as pointed out by Barro and King (1984), recently, several researchers have succeeded in producing the Pigou cycle by balancing the tension between the wealth effect and the substitution effect stemming from the higher expected future productivity. Seminal research by Christiano et al. (2007a) explains the “stock market boom-bust cycles,” characterized by increases in consumption, labor inputs, investment and the stock prices relating to high expected future technology levels, by introducing investment growth adjustment costs, habit formation in consumption, sticky prices and an inflation-targeting central bank. We, however, show that such a cycle is difficult to generate based on “growth expectation,” which reflect expectations of higher productivity growth rates. Thus, Barro and King’s (1984) prediction still applies.

<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)

This thesis considers how fiscal and monetary policy should be conducted in resourcerich economies. It consists of three papers addressing: whether governments should spend, save or invest volatile oil income; the assets they should save in; and how monetary policy should respond. The first, “Eight principles for managing resource wealth”, shows that capital-scarce countries should save relatively less against oil price volatility, and invest more in domestic capital. They also should prepare for volatility in advance, and treat savings as a source of income rather than a temporary buffer. To show this the paper develops a framework that nests a variety of existing results, which are presented in eight principles. The second, “The Elephant in the Ground: Oil extraction and asset allocation in sovereign wealth funds”, shows that governments should use sovereign wealth funds to offset oil price risk, extract oil faster if its price is pro-cyclical, and use precautionary savings to manage any residual volatility. To do this it combines three strands of literature for the first time: on continuous-time portfolio theory, oil extraction and precautionary savings. The third, “Optimal monetary responses to oil discoveries”, addresses the anticipation effects around an oil discovery. It shows that the terms of trade will need to appreciate twice: once when oil is discovered and consumers anticipate future revenues; and again when the government begins spending the revenues. Oil wealth will give the monetary authority an incentive to appreciate the terms of trade, in addition to stabilising domestic inflation and the output gap. Optimal policy is well-approximated by a standard monetary rule that also responds to expected changes in the natural level of output.

[pt] O presente trabalho busca analisar se um choque de notícia falsa que afetou os preços das ações da construtora europeia Vinci S.A., em novembro de 2016, teve algum componente de persistência na dissipação. Para tal, são construídos três modelos contrafactuais para traçar as trajetórias alternativas de preço que as ações da Vinci teriam percorrido na ausência do choque. A premissa básica do presente estudo é que os preços das ações são compostos por fundamento e por ruído (noise), sendo um choque de notícia falsa uma espécie de fenômeno natural em finanças, que torna possível separar o ruído dos fundamentos que definem o preço. Quando a informação falsa é absorvida como verdadeira, todos os agentes se tornam propagadores de ruído, ao passo que quando o ruído é revelado, o mercado deveria voltar a operar apenas com base nos fundamentos. Os resultados aqui encontrados apontam para uma rigidez temporária na trajetória de retorno do preço das ações ao seu preço fundamental após o choque, o que contraria a hipótese da incorporação imediata da informação ao preço proposta por algumas teorias de mercados eficientes. Os modelos aqui propostos mostraram-se bem especificados e as suas conclusões se corroboraram, conferindo robustez ao resultado. / [en] The present paper seeks to analyze if a fake news shock that affected the stock prices of the European construction company Vinci S.A., in November 2016, had any component of persistence in its dissipation. The paper constructs three contractual models to trace alternative trajectories for the price that Vinci stocks would have followed in the absence of the shock.The basic premise of this paper is that asset prices are composed both by noise and fundamental, and a fake news shock is a sort of natural phenomena in finance that makes it possible to identify the noise and the fundamental that compose prices. When false information is taken as true, all agents become temporally noise traders and when the noise is revealed, the market comes back to operate based on fundamental. The models point to a temporary stickiness of noise during the return of the prices to their fundamentals after the shock, contradicting the assumption of immediate incorporation of information to the price proposed by some Efficient Market Theories. The models have demonstrated to be well specified and they all have pointed to the same conclusions, conferring robustness to the results.