Author: Shalini MitraPublisher:
ISBN:
Category :
Languages : en
Pages : 0
Book Description
Essays on Volatility in Credit Constrained Economies
Author: Shalini MitraEssays on Economic Volatility and Financial Frictions
Author: Hongyan ZhaoPublisher:
ISBN:
Category :
Languages : en
Pages : 202
Book Description
This dissertation consists of three essays in macroeconomics. The first one essay discusses the reasons of Chinese huge foreign reserves holdings. It contributes to the literature of sudden stops, precautionary saving and foreign assets holdings. In the second essay, I study the price volatility of commodities and manufactured goods. I measure the price volatility of each individual goods but not on the aggregated level and therefore the results complete the related study. The third essay explores the correlation between the relative volatility of output to money stock and financial development. It extends the application of financial accelerator model. In the first essay, I address the question of China's extraordinary economic growth during the last decade and huge magnitude of foreign reserves holdings. The coexistence of fast economic growth and net capital outflow presents a puzzle to the conventional wisdom that developing countries should borrow from abroad. This paper develops a two-sector DSGE model to quantify the contribution of precautionary saving motivation against economic sudden stops. The risk of sudden stops comes from the lagged financial reforms in China, in which banks continue to support inefficient state-owned enterprises, while the more productive private firms are subject to strong discrimination in credit market, and face the endogenous collateral constraints. When the private sector is small, the impact on aggregate output of binding credit constraints is limited. However, as the output share of private sector increases, the negative effect of financial frictions on private firms grows, and it is more likely to trigger a nation-wide economic sudden stop. Thus, the precautionary savings rise and the demand for foreign assets also increases. Our calibration exercise based on Chinese macro data shows that 25 percent of foreign reserves can be accounted for by the rising probability of sudden stops. The second essay studies the relative volatility of commodity prices with a large dataset of monthly prices observed in international trade data from the United States over the period 2002 to 2011. The conventional wisdom in academia and policy circles is that primary commodity prices are more volatile than those of manufactured products, although most existing studies do not measure the relative volatility of prices of individual goods or commodities. The literature tends to focus on trends in the evolution and volatility of ratios of price indexes composed of multiple commodities and products. This approach can be misleading. The evidence presented here suggests that, on average, prices of individual primary commodities are less volatile than those of individual manufactured goods. Furthermore, robustness tests suggest that these results are not likely to be due to alternative product classification choices, differences in product exit rates, measurement errors in the trade data, or the level of aggregation of the trade data. Hence the explanation must be found in the realm of economics, rather than measurement. However, the challenges of managing terms of trade volatility in developing countries with concentrated export baskets remain. The third essay tries to understand why the relative volatility of nominal output to money stock is negatively related to countries' financial development level from cross-country evidence. In the paper I modify Bernanke et al. (1999)'s financial accelerator model by introducing the classic money demand function. The calibration to US data shows that the model is able to replicate this empirical pattern quite well. Given the same monetary shocks, countries with poorer financial system have larger output volatility due to the stronger effect of financial accelerator mechanism.
Essays on Output and Consumption Volatility in Less Developed Economies
Author: Miguel CardosoVolatility and Growth
Author: Philippe AghionPublisher: OUP Oxford
ISBN: 0191530239
Category : Business & Economics
Languages : en
Pages : 160
Book Description
It has long been recognized that productivity growth and the business cycle are closely interrelated. Yet, until recently, the two phenomena have been investigated separately in the economics literature. This book provides the first consistent attempt to analyze the effects of macroeconomic volatility on productivity growth, and also the reverse causality from growth to business cycles. The authors show that by looking at the economy through the lens of private entrepreneurs, who invest under credit constraints, one can go some way towards explaining persistent macroeconomic volatility and the effects of volatility on growth. Beginning with an analysis of the effects of volatility on growth, the authors argue that the lower the level of financial development in a country the more detrimental the effect of volatility on growth. This prediction is confirmed by cross-country panel regressions. The data also suggests that a fixed exchange rate regime or more countercyclical budgetary policies are growth-enhancing in countries with a lower level of financial development. The former reduce aggregate volatility whereas the latter reduce the negative effects of volatility on long-term productivity-enhancing investment by firms. The book concludes with an investigation into how the interplay between credit constraints and pecuniary externalities is sufficient to generate persistent business cycles and to explain the occurrence of currency crises.
Essays in International Macroeconomics
Author: Anurag SinghPublisher:
ISBN:
Category :
Languages : en
Pages :
Book Description
The third chapter looks at one of the key financial frictions in emerging and poor economies—the presence of credit constrained households—and the way they affect consumption-to-output volatility ratio in these countries. A higher than one ratio of consumption-to-output volatility in emerging and poor countries is at odds with the observation that emerging and poor countries are also the countries where a big fraction of consumers do not have access to financial services. This is because consumers with no access to financial services cannot smooth consumption and can only have a consumption volatility to output volatility ratio of one. Therefore, in the presence of credit constrained households, the consumption volatility to output volatility ratio in the theoretical models should move closer to one rather than going up and away from one. This chapter, therefore, incorporates credit constrained households in an augmented real business cycle (RBC) model to study their effect on economic fluctuations in a set on 75 countries.
Essays on Financial Market Volatility and Real Economic Activity
Author: Sang Yup ChoiPublisher:
ISBN:
Category :
Languages : en
Pages : 130
Book Description
This dissertation studies how financial market volatility or uncertainty in the U.S. economy affects real economic activity both in the U.S. and other open economies. Chapter 1 critically examines a stylized fact about the effects of uncertainty shocks on the U.S. economy. A link between uncertainty and firms' investment, hiring, and production decisions has drawn much attention in contemporary discussions after the 2008 financial crisis. Bloom (2009) showed that uncertainty events, identified by spikes in stock market volatility, triggered immediate falls in output and employment, followed by rapid rebounds. I show that such stock market volatility shocks failed to produce this same pattern of responses after 1983. Chapter 2 studies the effects of risk aversion shocks, measured by increases in the VIX, on emerging market economies (EMEs). By estimating a structural vector autoregression (VAR) model, I find that, although risk aversion shocks do not have much impact on U.S. output, they do have a noticeable impact on the output of EMEs. To explain the contrast between the impact of risk appetite shocks on EMEs and the impact on the U.S. economy, a credit channel is proposed as a propagation mechanism. In the model, an increase in the VIX is translated to a risk-aversion shock that generates a "flight to quality." As international investors pull their money from EMEs, borrowing costs increase and domestic credit falls as a consequence of credit market imperfections. Higher borrowing costs, in turn, lead to a fall in investment that causes a real depreciation and a decline in total output through sectoral linkages. Finally, Chapter 3, which is co-authored with Prakash Loungani, studies the effect of uncertainty shocks on unemployment dynamics by separating out the role of aggregate and sectoral channels. Using SP500 data from the first quarter of 1963 through the third quarter of 2014, we construct a separate index to measure sectoral uncertainty and compare its effects on the unemployment rate with that of aggregate uncertainty in a standard VAR model, augmented by a local projection method. We find that aggregate uncertainty shocks lead to an immediate increase in unemployment, followed by swift reversals. In contrast, sectoral uncertainty shocks have a long-lasting impact on unemployment, with the peak impact occurring after two years. Our findings highlight an additional channel through which uncertainty shocks have persistent effects on unemployment by requiring substantial inter-industry labor reallocation.
Three Essays on Monetary Policy in Economies with Financial Frictions
Author: Rahul AnandPublisher:
ISBN:
Category :
Languages : en
Pages : 0
Book Description
The objective of this dissertation is to understand the role of financial frictions in the transmission of shocks and their effect on the monetary policy transmission mechanism. To accomplish the task, we develop Dynamic Stochastic General equilibrium models with financial frictions. In the first chapter, we develop a model to analytically determine the appropriate price index to target in the presence of financial frictions (where a fraction of households are constrained to consume their wage income each period). The analysis suggests that in the presence of financial frictions, a welfare-maximizing central bank should adopt flexible headline inflation targeting-i.e. a headline inflation target but with some weight on the output gap. These results are particularly relevant for emerging markets, where the share of food expenditures in total consumption expenditures is high and a large proportion of consumers are credit constrained. In the second chapter, we develop a small open economy model with macrofinancial linkages. The model includes a financial accelerator - entrepreneurs are assumed to partially finance investment using domestic and foreign currency debt - to assess the importance of financial frictions in the amplification and propagation of the effects of transitory shocks to productivity, interest rates and net worth of firms. We use Bayesian estimation techniques to estimate the model using India data. The model is used to assess the importance of the financial accelerator in India and to assess the optimality of the current monetary policy rule. In the third chapter, we develop a small open economy New Keynesian model with financial frictions and an active banking sector for India. We find that the presence of a monopolistic banking sector with sticky interest rate setting attenuates the shocks. However, if the interest rates are flexible it results in the amplification of shocks. We also find that an unexpected reduction in bank capital can have a substantial impact on the real economy and particularly on investment. Use of nonmonetary policy tools result in greater volatility as compared to when central banks use traditional monetary tightening.
Essays on Sovereign Default
Author: Publisher:
ISBN:
Category :
Languages : en
Pages : 78
Book Description
This dissertation consists of three independent essays on sovereign default. In the first chapter, I develop a quantitative general equilibrium model of sovereign default to account for spillover of default risk across countries. When the collateral constraint for investors binds due to a decrease in the value of collateral, triggered by a high default risk for one country, credit constrained investors ask for liquidity premiums even to countries with normal fundamentals. This increase in the cost of borrowing increases incentives to default for the other countries with normal fundamentals, further constraining investors in obtaining credit through a decrease in the value of collateral. The quantitative results show that this model can generate spillover of default risk across countries. The essay in the second chapter introduces endogenous capital accumulation to a quantitative model of sovereign default based on Eaton and Gersovitz (1981). With a production technology in the model, output and interest rates are jointly determined by the interaction between a sovereign government who can optimally default and foreign creditors taking into account default risk. Adding investment enables the model to generate unique economic dynamics similar to those observed around emerging economies' default crises: (1) Emerging economies' debt crises display a boom-bust pattern. (2) A non-negligible fraction of sovereign defaults occur in good times. The essay in the third chapter explains why emerging economies borrow abroad in foreign currency. We present a two-period model in which foreign lenders offer a small open economy an optimal self-enforcing contract in which borrowing is denominated in borrowers' currency. Taking into account the government's incentive to inflate away the debt, the optimal lending contract provides consumption insurance for the economy in that the contract allows the economy for inflation in bad times but asks for deflation in good times. As the variance of income shocks for the economy increases, it gets more difficult for the contract to satisfy the incentive compatible constraints at the good income state. The numerical results are consistent with the fact that emerging economies with high income volatility suffer from "Original Sin".
Essays on Sovereign Default
Author: JungJae ParkPublisher:
ISBN:
Category :
Languages : en
Pages : 0
Book Description
This dissertation consists of three independent essays on sovereign default. In the first chapter, I develop a quantitative general equilibrium model of sovereign default to account for spillover of default risk across countries. When the collateral constraint for investors binds due to a decrease in the value of collateral, triggered by a high default risk for one country, credit constrained investors ask for liquidity premiums even to countries with normal fundamentals. This increase in the cost of borrowing increases incentives to default for the other countries with normal fundamentals, further constraining investors in obtaining credit through a decrease in the value of collateral. The quantitative results show that this model can generate spillover of default risk across countries. The essay in the second chapter introduces endogenous capital accumulation to a quantitative model of sovereign default based on Eaton and Gersovitz (1981). With a production technology in the model, output and interest rates are jointly determined by the interaction between a sovereign government who can optimally default and foreign creditors taking into account default risk. Adding investment enables the model to generate unique economic dynamics similar to those observed around emerging economies' default crises: (1) Emerging economies' debt crises display a boom-bust pattern. (2) A non-negligible fraction of sovereign defaults occur in good times. The essay in the third chapter explains why emerging economies borrow abroad in foreign currency. We present a two-period model in which foreign lenders offer a small open economy an optimal self-enforcing contract in which borrowing is denominated in borrowers' currency. Taking into account the government's incentive to inflate away the debt, the optimal lending contract provides consumption insurance for the economy in that the contract allows the economy for inflation in bad times but asks for deflation in good times. As the variance of income shocks for the economy increases, it gets more difficult for the contract to satisfy the incentive compatible constraints at the good income state. The numerical results are consistent with the fact that emerging economies with high income volatility suffer from "Original Sin".
Too Much Finance?
Author: Mr.Jean-Louis ArcandPublisher: International Monetary Fund
ISBN: 1475526105
Category : Business & Economics
Languages : en
Pages : 50
Book Description
This paper examines whether there is a threshold above which financial development no longer has a positive effect on economic growth. We use different empirical approaches to show that there can indeed be "too much" finance. In particular, our results suggest that finance starts having a negative effect on output growth when credit to the private sector reaches 100% of GDP. We show that our results are consistent with the "vanishing effect" of financial development and that they are not driven by output volatility, banking crises, low institutional quality, or by differences in bank regulation and supervision.