Thesis advisor: Ryan Chahrour / The dissertation studies the sources of business cycles taking both an open and a closed economy perspective. A common feature of the two chapters composing the dissertation is the use of simple, but powerful classifications and identifications of sources of business cycles. In particular, the first chapter, titled “What are the Sources of Boom-Bust Cycles?”, concerns the distinction between economic fluctuations due to changes in beliefs, and fluctuations due to changes in fundamentals, showing results that challenge traditional approaches to modeling business cycles. The second chapter, titled “Shocks and Exchange Rates in Small Open Economies”, takes the perspective of small open economies, and concerns the distinc- tion between global and domestic shocks, showing results that are informative for a series of puzzling facts concerning the dynamics of the exchange rate. In “What are the Sources of Boom-Bust Cycles?,” joint with Marco Brianti, we provide a synthesis of two major views on economic fluctuations. One view maintains that expansions and recessions arise from the interchange of positive and negative persistent exogenous shocks to fundamentals. This is the conventional view that gave rise to the profusion of shocks used in modern dynamic stochastic general equilibrium models. In contrast, a second view, which we call the endogenous cycles view, holds that business cycle fluctuations are due to forces that are internal to the economy and that endogenously favor recurrent periods of boom followed by a bust. In this environment, cycles can occur after small perturba- tions of the long run equilibrium. We find empirical evidence pointing at the coexistence of both views. In particular, we find that the cyclical behaviour of economic aggregates is due in part to strong internal mechanisms that generate boom-bust phenomena in response to small changes in expectations, and in part to the interchange of positive and negative persistent fundamental shocks. Motivated by our findings, we build a theory that unifies the dominant paradigm with the endogenous cycles approach. Our theory suggests that recessions and expansions are intimately related phenomena, and that understanding the nature of an expansion, whether it is driven by fundamentals or by beliefs, is a first order issue for policy makers whose mandate is to limit the occurrance of inefficient economic fluctuations. In “Shocks and Exchange Rates in Small Open Economies,” joint with Pierre De Leo, we propose a novel approach to separately identify domestic and external shocks in small open economies. Our results provide guidance about the transmission mechanism of these shocks and revisit recent conclusions drawn on the exchange rate effects of monetary policy in small open economies. The identification method is based on the premise that shocks originating from within a small economy should not influence world variables at any horizon, while external (or global) shocks should affect world variables at least at some horizon. We obtain three empirically related findings. First, external shocks feature large deviations from uncovered interest parity, while domestic shocks do not. Second, external shocks strongly comove with global risk aversion and U.S. macroeconomic variables. Third, recent puzzling estimates of the exchange rate effects of monetary policy stem from an identification of domestic shocks that fails to properly account for international spillovers. We show that a two-country small open economy model with international asset market imperfections is consistent with these facts. In our proposed model, global risk aversion shocks drive exchange rate dynamics, and a country’s net foreign asset position governs their international transmission. We provide empirical evidence that a country’s exposure to external shocks indeed depends on its net foreign asset position. / Thesis (PhD) — Boston College, 2020. / Submitted to: Boston College. Graduate School of Arts and Sciences. / Discipline: Economics.
| Identifer | oai:union.ndltd.org:BOSTON/oai:dlib.bc.edu:bc-ir_108723 |
| Date | January 2020 |
| Creators | Cormun, Vito |
| Publisher | Boston College |
| Source Sets | Boston College |
| Language | English |
| Detected Language | English |
| Type | Text, thesis |
| Format | electronic, application/pdf |
| Rights | Copyright is held by the author, with all rights reserved, unless otherwise noted. |
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