Three essays on financial development macroeconomic volatility and monetary policy

Abstract

This thesis was submitted for the award of Doctor of Philosophy and was awarded by Brunel University LondonThis thesis consists of three studies that cover topics in the increasingly in uential eld of nancial development and monetary policy. Chapters 2 and 3 explore the case of Brazil by (i) investigating whether (and how di¤erently) deposits in public and in private banks a¤ect economic growth over extremely long- time horizons using an uncommon econometric framework and (ii) revisiting the growth- nance nexus using a new econometric approach and a new and unique data set. More speci cally in Chapter 2 utilizes a PARCH framework and data for Brazil from 1870 to 2018 we nd that the main explanatory factors, solely in terms of their negative lagged indirect/direct (short-run) e¤ects on economic growth in Brazil, turn out to be the domestic nancial development indicators. Further, we nd robust evidence that the U.S. interest rate a¤ects growth positively both indirectly (via its volatility) and directly (both in the short- and long-run). Our results are robust to the inclusion of other economic variables i.e. trade openness and public de cit. We also argue that domestic nancial development in uences growth negatively in the short-run but positively in the long-run, whereas the impact of international nancial integration is positive in both cases. Furthermore, the impact of private and public ownership on economic growth tends to be both direct and indirect. However, our parameter estimations highlight the signi cantly higher (in absolute magnitude) negative indirect and direct short-run e¤ects of public banks (compared to those of private banks) on growth. Finally, trade openness and public de cit in uence output growth negatively in the short-run. Our results are robust to the inclusion of population, in ation, and authority score as well as dummy variables. Chapter 3 uses the smooth transition framework and annual time series data for Brazil (i.e. annual growth rate of gross domestic product (gdp), nancial development, trade openness and a set of political instability indicators) covering the period from a very long time window, from 1890 to 2003. The new data we use in this chapter is for political instability. Our research contributes further to the literature by extending the track of political instability back to the year of 1890. More speci cally, we constructed our own informal and formal political instability series from 1890 to 1919 (a period with high political uncertainty in Brazil). Our main ndings are that (a) nancial development has a mixed (positive and negative) time-varying impact on economic growth (which signi cantly depends on jointly estimated trade openness thresholds); (b) trade openness has a positive e¤ect, whereas (c) the e¤ect of political instability, both formal and informal, on growth is unambiguously negative. Finally, Chapter 4 continues the investigation on the empirical magnitude of the scal multipliers and its determinants in the U.S.. We estimate the e¤ects of unanticipated government spending shocks on output using quarterly U.S. data, 1986-2017. Our contribution is to estimate time-varying scal multi- pliers conditional on di¤erent states of the business cycle by smooth-transition estimation, characterising multipliers by the sign of the spending shocks