This thesis examines economic uncertainty from various sources, and studies the impact of uncertainty on the macroeconomy. In Chapter I, I theoretically investigate uncertainty on asset returns and its role in financial fragility using a stylized model where the level of uncertainty is endogenously chosen by banks. The risk behavior of banks imposes a negative externality on the profitability of other banks because liquidation of risky assets depresses asset prices in the secondary market. Combined with limited liability, the model can give rise to a vicious feedback loop between collective risk-taking behavior in the banking sector and fire sales of assets. The model suggests that ''panics'' over fire sales of assets can initiate banks' perverse risk-taking incentives, and trigger a self-fulfilling financial crisis where banks are taking risky investment, market liquidity is low, and credit risk is high.
In Chapter II, I study empirically the role of productivity uncertainty on firms' investment in customer base. I find that similar to the case of physical capital investment, idiosyncratic uncertainty has a significant negative impact on customer base investment. However, different from the case for physical capital investment, firms with low customer base tend to be more sensitive to uncertainty. The empirical analysis suggests an alternative transmission mechanism for uncertainty shocks to the real economy that relies on the interaction between idiosyncratic uncertainty and product market frictions.
In Chapter III, I focus on uncertainty about the monetary policy stance of the central bank. I investigate the optimal monetary policy in a theoretical framework where households are uncertain about central bank credibility. Contrary to the binary ''commitment vs. discretion'' commitment setting, the central bank in this model is able to commit to the optimal plan it formulates, but only over some finite (random) horizons due to its temptation to renege on the plan. Given that central bank credibility deteriorates with high inflation rates in the past, the central bank would contemplate on the impact of inflation on its future credibility and social welfare, in addition to the traditional inflation-output tradeoff. The main finding is that the central bank would enhance its credibility directly through a more conservative inflation policy.
| Identifer | oai:union.ndltd.org:bu.edu/oai:open.bu.edu:2144/33049 |
| Date | 07 November 2018 |
| Creators | Jiang, Yue |
| Contributors | Chamley, Christophe |
| Source Sets | Boston University |
| Language | en_US |
| Detected Language | English |
| Type | Thesis/Dissertation |
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