Essays on empirical macroeconomics and international financial markets
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Abstract
The thesis consists of three chapters of self-contained empirical studies.
In Chapter 1, we examine long-run and short-run dynamics of US real
trade balance with Canada. In addition to the linear error-correction model, the
Markov-switching error-correction model is employed, using quarterly data from
1985 to 2008. We find that real exchange rate, real oil price and real new housing
price index have statistically significant effects on US real trade balance with
Canada in the long run. We acquire evidence of short-run J-curve. Results show
that short-run dynamic effects of real oil price are not so fearful, with statistically
insignificant effect on real trade balance following an increase in real oil price.
House prices could be argued as being strongly relevant for settlement and
adjustment of US trade balance in the long run through the wealth effects.
However, the immediate (next-quarter) effect of a change in housing wealth is
insignificant, consistent with existing literature. US real trade balance with
Canada forecasts from our non-linear VAR model outperform ones from the
linear VAR in first difference (DVAR) model and ones from the random walk
model. The long-term out-of-sample forecastability is not much improved by the
oil price and house price variables, which, nonetheless, actively explain in-sample
movement of US real trade balance with Canada in the long run.
In Chapter 2, we examine the effect of monetary policy and exchange rate
on stock price movements in Asia. We employ a Bayesian structural vector
autoregression model and impose sign restrictions to identify simultaneously and
uniquely contractionary monetary policy shocks and exchange rate depreciation
shocks in an integrated framework. This study covers the stock markets of
Thailand, Malaysia and South Korea, over the period 1989-2008. Our main results
acquired using sign restrictions show that monetary policy shocks result in a
strongly persistent effect on market index real stock prices whereas the impact of
exchange rate shocks is short-lived over the short run. The variance
decomposition suggests that the exchange rate is as important as monetary policy
for explaining the dynamics of market and financial sector index real stock prices.
More precisely, for all the countries examined, real exchange rate developments
have been more important in the short run.
In Chapter 3, within the context of a time-varying transition probabilities
Markov-switching model of the uncovered interest parity (UIP) condition, we
examine if variables measuring fear and volatility have an effect on the
probability of switching between the regime where the UIP condition holds and
the regime where it does not. The state transition probability depends nonlinearly
upon the variables examined. These are the exchange rate volatility, the VIX
equity option implied volatility index and the TED spread. Applying this to both
US dollar exchange rates and cross (exchange) rates from January 4, 1990 to
September 11, 2008, we find that those three variables increase the probability of
remaining in the regime where the UIP condition holds. In addition, the
probability of switching from the regime where the UIP condition does not hold
to the regime where the exchange rate follows the UIP condition decreases as
these variables measuring fear and volatility fall, especially the VIX equity option
implied volatility index. The smoothed probabilities show that exchange rates
examined essentially do not follow the UIP condition except during periods in
which the fear and risk variables are increasing, as in the recent global financial
crisis in particular