Optimal Foreign Reserves, The Dollar Trap and Demand for Global Safe Assets: A DSGE analysis for China

The recent surge of foreign reserves in emerging markets has sparked fierce debate about what level of reserves is the optimal amount for a country. Conventional models have achieved important advances in understanding the behaviour of central banks’ reserve policy, but fail to find convincing solutions to the puzzle of why emerging economies, and China in particular, would continue to accumulate massive reserves. With reference to China’s massive hoarding of foreign reserves, this thesis develops a representative agent model with elements of dynamic stochastic general equilibrium (DSGE) modelling. The model constructed in this thesis explicitly considers the risky steady state as the equilibrium point when agents take into account future uncertainty but when the shock realizations are zero. In this risky steady state we derive the optimal reserves for emerging markets, with particular reference to the Chinese case. The precautionary savings motivation for holding reserves is then analysed within this framework. This thesis derives the optimality of Chinese reserve accumulation, and provides a plausible explanation for reserve build-up in China and its underlying driving forces. In order to better understand the foreign reserves accumulation, this thesis further attempts to analyse current external wealth allocation in a portfolio perspective within a DSGE framework. A two-country model is employed, and a Value at Risk (VaR) constraint is introduced to reproduce the risk averse behaviour of investors. After accounting for risk diversification, our findings imply that an investor would shift their portfolio holding to bond related assets. Finally, China has accumulated a huge amount of foreign reserves. The majority of these assets are denominated in the US dollar. Furthermore, in terms of asset type, the US T-bill is the dominant investment instrument in China’s international portfolio choice. This raises questions as to why the central bank of China chooses to make such an investment decision, and what the global repercussions might be. Therefore, China’s role in the growing demand for global safe assets deserves exploration. Given the world-wide shortage of global safe assets, to what extent China will continue the current international investment decision, and the driving forces behind such policy inertia, are major concerns. In order to gain a better understanding, this thesis applies a global solving method, as well as a standard local solving method

Empirical Essays on Energy Economics

The main part of this thesis consists of three distinct essays that empirically analyze economic issues related to energy markets in the United States and Europe. The first chapter provides an introduction and discusses the motivation for the different analyses pursued in this thesis. The second chapter examines attention effects in the market for hybrid vehicles. We show that local media coverage, gasoline price changes and unprecedented record gasoline prices have a significant impact on the consumers' attention. As attention is not directly observable, we analyze online search behavior as a proxy for the revealed consumer attention. Our study is based on a unique weekly panel dataset for 19 metropolitan areas in the US. Additionally, we use monthly state-level panel data to show that the adoption rate of hybrid vehicles is robustly related to our measure of attention. Our results show that the consumers' attention fluctuates strongly and systematically. The third chapter shows how the effect of fuel prices varies with the level of electricity demand. It analyzes the relationship between daily prices of electricity, natural gas and carbon emission allowances with a semiparametric varying smooth coefficient cointegration model. This model is used to analyze the market impact of the nuclear moratorium by the German Government in March 2011. Futures prices of electricity, natural gas and emission allowances are used to show that the market efficiently accounts for the suspended capacity and correctly expects that several nuclear plants will not be switched on after the moratorium. In the fourth chapter, we develop a structural vector autoregressive model (VAR) for the German natural gas market. In particular, we illustrate the usefulness of our approach by disentangling the effects of different fundamental influences during four specific events: The financial crisis starting in 2008, the Russian-Ukrainian gas dispute in January 2009, the Libyan civil war in 2011 as well as the cold spell and Russian supply interruption in February 2012. Our results show that the natural gas price is affected by temperature, storage and supply shortfalls in the short term, while the long-term development is closely tied to crude oil and coal prices

Efficiency versus Robustness of Markets - Why improving market efficiency should not be the only objective of market regulation

The efficiency of capital markets has been questioned almost as long as the efficient market hypothesis had been worked out. Numerous critics have been formulated against this hypothesis, questioning notably the behavioural assumptions underlying the efficient market hypothesis. The present contribution does not focus on the behavioural assumptions but rather looks at the implications of focusing purely on the objective of market efficiency when considering market design questions. Hence it aims at discussing the following, possibly rather fundamental issue: Is the objective of efficiency, which has guided most of the market reforms in the last decades, sufficient? Or has it to be complemented by the objective of robustness? Mathematical and engineering control theory has developed the concept of robust control (e.g. Zhou and Doyle, 1998) and it has been shown that there is always a trade-off between the efficiency of a control system and its robustness (cf. e.g. Safonov, 1981, Doyle et al., 1988). The efficiency of the system describes its reactions to disturbance signals. The lower the integral loss function over the so-called transfer or sensitivity function, the less a system is affected by disturbances such as demand fluctuations, and the more efficient is the control. The economic equivalent clearly is the maximisation of welfare, which results in an efficient economic system. Robustness by contrast is defined as stability of the control system in the presence of model uncertainty (deviations in the model parameters or misperceptions of the underlying system). These concepts are applied to the financial markets in their interaction with the real economy. The financial markets being understood as the controllers of real world activity through investments, the implications of misperceptions in the financial sphere are analysed both theoretically and in an application example. From the theory it may readily derived that financial markets providing efficient, i.e. welfare-optimal solutions, must have limitations with respect to robustness. Also in the application example it turns out that in the presence of potential misperception a reduction of irreversible cost shares in investments may lead to an increase in overall expected system costs. Hence improvements in (conventional) market efficiency may be counter-productive by facilitating misallocation of capital as a consequence of misperceptions in the financial markets. This leads to the conclusion that a sole focus on the efficiency objective in market design is problematic and some of the recent turmoil in financial markets may be explained by the lack of consideration given to robustness issues.market efficiency, robustness, optimal control, stochastic dynamic growth

Firm Regulation and Profit-Sharing: A Real Option Approach

To avoid the extremely high profit levels found in recent experience of public utilities’ regulation, some regulators have introduced a profit-sharing (PS) rule that revises prices to the benefit of consumers. However, in order to be successful, a PS rule should satisfy appropriate incentive conditions. In this paper, we study the incentive properties of a second best PS mechanism designed by the regulator to induce a regulated monopolist to divert its "excessive" profits to the customers. In a real option model where a regulated monopolist manages a long-term franchise contract and the regulator has the option to revoke the contract if there is serious welfare loss, we first endogenously derive the welfare maximising PS rule under the verifiability of profits. We then explore the dynamic efficiency of this PS rule under non-verifiability of profits and study the firm’s incentive to comply with it in an infinite-horizon game. Finally, we derive the price adjustment path which follows the adoption of a PS rule in a price cap regulation. We show that the riskiness of the distribution of the firm’s future profits and the regulator’s cost in revoking the franchise contract are key factors in determining the equilibrium properties of a dynamic PS rule.

A quantitative theory of the gender gap in wages

This paper measures how much of the gender wage gap over the life cycle is due to the fact that working hours are lower for women than for men. We build a quantitative theory of fertility, labor supply, and human capital accumulation decisions to measure gender differences in human capital investments over the life cycle. We assume that there are no gender differences in the human capital technology and calibrate this technology using wage-age profiles of men. The calibration of females assumes that children involves a forced reduction in hours of work that falls on females rather than on males and that there is an exogenous gender gap in hours of work. We find that our theory accounts for all of the increase in the gender wage gap over the life cycle in the NLSY79 data. The impact of children on the labor supply of females accounts for 56% and 45% of the increase in the gender wage gap over the life cycle among non-college and college females, while the rest is due to the exogenous gender differences in hours of work. (C) 2016 Elsevier B.V. All rights reserved.Erosa and Luisa Fuster gratefully acknowledge financial support from the Ministerio Economía y Competitividad of Spain, Grants ECO2012-31653 and MDM 2014-0431, and from MadEco-CM, Grant S2015/HUM-3444

SIMULATION AND MITIGATION OF POWER QUALITY DISTURBANCES ON A DISTRIBUTION SYSTEM USING DVR

Voltage sag is the most important power quality problem faced by many industrial customers. Equipment such as process controllers, programmable logic controllers, adjustable speed drives, robotics, etc used in modern industrial plants are actually becoming more sensitive to voltage sags. Voltage sags are normally described by the magnitude variation and duration, and also characterized by unbalance, non-sinusoidal wave shape and phase angle shift. One of the most common mitigation solution is installing uninterrupted power supply (UPS). To meet the demand for more efficient mitigation solution, the Dynamic Voltage Restorer (DVR) will be deployed. When a fault occurs, either at the high voltage source end or at the consumer end, the DVR injects active and reactive power for the restoration of the voltage sags in the network. This thesis presents the power quality problems faced by the power distribution systems in general and then concentrates on analyzing an important and specific distribution system in particular. A dynamic voltage restorer (DVR) is connected on the 11KV of an utility feeder to Ipoh hospital, in reducing the voltage sags, that affect the operation of sensitive loads to the hospital. Case studies were conducted at four industrial sites (Hitachi plant and Nihoncanpack at Bemban, Filrex at Bercham and Ipoh Hospital) by monitoring and taking physical sag measurements for a period of one month. The real time measurements were carried out to identify the types power quality disturbances that exits in the various plants before providing the custom power device as a mitigation tool. The Ipoh Hospital is taken for a special case study since the hospital has to maintain high quality power supply to the medical equipments such as CT Scan, Magnetic Resonance Imaging (MRI), Magnetic Scanner, X-ray unit, and other life savingequipment. For simulation study, PSS/ADEPT and PSCAD/EMTDC software packages were used in modeling of the power distribution system. With the PSS/ADEPT simulation tool, the voltage severity is studied by introducing different types of faults. The PSCAD/EMTDC is a graphical user interface simulation tool to simulate sag waveforms for various types of faults. A DVR was modeled using the PSCAD/EMTDC software and simulated for voltage sag mitigation. The recorded waveform shows the DVR as a potential custom power solution provider. The DVR can improve the overall voltage regulation. The results obtained from the DVR show that the voltage sags are reduced by bringing the supply voltage level to 100%. The simulated results were verified for selected faults theoretically. v

Macroprudential regulation as part of the Mexican policy toolkit

The objective of this work is to assess the effect of implementing countercyclical macroprudential regulation in Mexico with the objective of verify whether this type of policy is welfare-improving. Using a DSGE model, two kinds of macroprudential rules are tested: countercyclical bank capital requirements and countercyclical loan-to-value ratios. Results suggest that these rules are welfare-improving and avoid the formation of credit bubbles as well as facilitate loans in the presence of macroeconomic crises. Results suggest that the use of countercyclical rules is effective in keeping the debt level according to its long-term equilibrium. This paper presents a theoretical framework to analyze banking regulation for policy purposes and is the first attempt to analyze countercyclical regulation in Mexico using a microfounded model. Results can be used to rationalize the use of macroprudential tools during the COVID‑19 pandemic given the current interventions in the Mexican banking system.Regulación macroprudencial como parte de las herramientas de política pública mexicana. El objetivo de este trabajo es evaluar el efecto de la implementación de la regulación macroprudencial contracíclica en México con el objetivo de verificar si este tipo de política mejora el bienestar. Utilizando un modelo DSGE, se prueban dos tipos de reglas macroprudenciales: los requisitos de capital bancario contracíclico y las razones de préstamo-valor contracíclico.  Los resultados sugieren que estas reglas mejoran el bienestar y evitan la formación de burbujas de crédito, además de facilitar los préstamos en presencia de crisis macroeconómicas. Los resultados sugieren que el uso de reglas contracíclicas es efectivo para mantener el nivel de deuda de acuerdo con su equilibrio a largo plazo. Este documento presenta un marco teórico para analizar la regulación bancaria con fines de política pública y es el primer intento de analizar la regulación contracíclica en México utilizando un modelo microfundamentado. Los resultados pueden usarse para racionalizar el uso de herramientas macroprudenciales durante la pandemia del COVID-19, dadas las recientes intervenciones en el sistema bancario mexicano

Harmonic Estimation Of Distorted Power Signals Using PSO – Adaline

In recent times, power system harmonics has got a great deal of interest by many Power system Engineers. It is primarily due to the fact that non-linear loads comprise an increasing portion of the total load for a typical industrial plant. This increase in proportion of non-linear load and due to increased use of semi-conductor based power processors by utility companies has detoriated the Power Quality. Harmonics are a mathematical way of describing distortion in voltage or current waveform. The term harmonic refers to a component of a waveform occurs at an integer multiple of the fundamental frequency. Several methods had been proposed, such as discrete Fourier transforms, least square error technique, Kalman filtering, adaptive notch filters etc; Unlike above techniques, which treat harmonic estimation as completely non-linear problem there are some other hybrid techniques like Genetic Algorithm (GA), LS-Adaline, LS-PSOPC which decompose the problem of harmonic estimation into linear and non-linear problem. The results of LS-PSOPC and LS-Adaline has most attractive features of compactness and fastness. . Our new proposed technique tries to reduce the pitfalls in the LS-PSOPC, LS-Adaline techniques. With new technique we tried to estimate the Amplitudes by Least square estimator, frequency of the signal by PSOPC and phases of the harmonics by Adaline technique using MATLAB program. Harmonic signals were estimated by using LS-PSOPC, PSOPC-Adaline. Errors in estimating the signal by both the techniques are calculated and compared with each other