Noisy Business Cycles

This paper investigates a real-business-cycle economy that features dispersed information about the underlying aggregate productivity shocks, taste shocks, and—potentially—shocks to monopoly power. We show how the dispersion of information can (i) contribute to significant inertia in the response of macroeconomic outcomes to such shocks; (ii) induce a negative shortrun response of employment to productivity shocks; (iii) imply that productivity shocks explain only a small fraction of high-frequency fluctuations; (iv) contribute to significant noise in the business cycle; (v) formalize a certain type of demand shocks within an RBC economy; and (vi) generate cyclical variation in observed Solow residuals and labor wedges. Importantly, none of these properties requires significant uncertainty about the underlying fundamentals: they rest on the heterogeneity of information and the strength of trade linkages in the economy, not the level of uncertainty. Finally, none of these properties are symptoms of inefficiency: apart from undoing monopoly distortions or providing the agents with more information, no policy intervention can improve upon the equilibrium allocations

Noisy business cycles

May 14, 200

Noisy Business Cycles

This paper investigates a real-business-cycle economy that features dispersed information about the underlying aggregate productivity shocks, taste shocks, and, potentially, shocks to monopoly power. We show how the dispersion of information can (i) contribute to significant inertia in the response of macroeconomic outcomes to such shocks; (ii) induce a negative short-run response of employment to productivity shocks; (iii) imply that productivity shocks explain only a small fraction of high-frequency fluctuations; (iv) contribute to significant noise in the business cycle; (v) formalize a certain type of demand shocks within an RBC economy; and (vi) generate cyclical variation in observed Solow residuals and labor wedges. Importantly, none of these properties requires significant uncertainty about the underlying fundamentals: they rest on the heterogeneity of information and the strength of trade linkages in the economy, not the level of uncertainty. Finally, none of these properties are symptoms of inefficiency: apart from undoing monopoly distortions or providing the agents with more information, no policy intervention can improve upon the equilibrium allocations.

Essays On Economic Uncertainty And Macro-Finance

This dissertation studies topics in macro-finance with a focus on economic uncertainty. The first chapter (Government Debt and Risk Premia) studies the implications of government debt for asset prices. I document a set of new facts that government debt is related to risk premia in various asset markets. First, the debt-to-GDP ratio positively predicts excess stock returns. The forecast power is compelling, and it outperforms many popular predictors. Second, higher debt-to-GDP ratio is correlated with higher credit risk premia in both corporate bond excess returns and yield spreads. Third, higher debt-to-GDP ratio is associated with lower real risk-free rate. Fourth, higher debt-to-GDP ratio predicts lower average returns on government debt. Expected return variation contributes to a sizable amount of the volatility of the debt-to-GDP ratio. Fifth, debt-to-GDP ratio positively comoves with fiscal policy uncertainty. Fiscal uncertainty also has direct effects on the asset prices consistent with the effect of debt-to-GDP ratio. I rationalize these empirical findings in a general equilibrium model featuring recursive preferences, endogenous growth, and time-varying fiscal uncertainty. In the model, the tax risk premium is sizable and its time variation is driven by fiscal uncertainty. Furthermore, the model generates an endogenous positive relationship between the debt-to-GDP ratio and fiscal uncertainty: fiscal uncertainty increases debt valuation through discount rate channel whereas higher debt conversely raises uncertainty in future fiscal consolidations. In the second chapter (Volatility Risk Pass-Through), we estimate and explain the international transmission of output volatility shocks to both currencies and international quantity dynamics. We produce novel empirical evidence on the relevance of output volatility (vol) shocks for both currency and international quantity dynamics. Focusing on G-17 countries, we document several facts: (1) consumption and output vols are imperfectly correlated within countries; (2) across countries, consumption vol is more correlated than output vol; (3) the pass-through of relative output vol shocks onto relative consumption vol is moderate, especially if the uncertainty shocks originate from small countries; and (4) consumption differentials vol and exchange rate vol are disconnected, in contrast to the perfect correlation implied by a model of perfect risk-sharing with time-additive preferences. We rationalize these findings in a frictionless model with multiple goods and recursive preferences featuring a novel-and-rich risk-sharing of vol shocks. The third chapter (Volatility, Intermediaries, and Exchange Rates) studies how financial market volatility drives exchange rates through the risk management practice of financial intermediaries. We build a model in which the major participants in the international financial market are levered intermediaries subject to Value-at-Risk constraints. Higher portfolio volatility translates into tighter funding conditions and increased marginal value of wealth. Thus, foreign currency is expected to appreciate. Our model can resolve the Backus-Smith puzzle, the forward premium puzzle, and the exchange rate volatility puzzle quantitatively. Our empirical test verifies two implications of the model that both financial market volatility and funding condition measurement have predictive power on exchange rates

Is News Sentiment More Than Just Noise?

Big Data analytics has recently fostered significant research on the influence of news sentiment in finance. This paper thus examines the effect of news sentiment on crude oil prices for different investor types according to the noise trader approach. The noise trader approach assumes the presence of informed and uninformed investors. Informed investors possess a perfect information horizon, whereas uninformed investors trade upon noise signals, such as sentiment. Methodologically, we decompose the crude oil price with a Kalman filter into a Kalman-smoothed, fundamental price component and a noise residual. We then regress news sentiment on both decomposed oil price components. Our findings suggest that news sentiment not only has a significant positive effect on the noise residual (as suggested by the noise trader approach), but also on the fundamental price. Thus, we find empirical evidence contradicting the noise trader model, which assumes that only uninformed investors trade on sentiment

Food price dynamics and inflation in Sri Lanka

Food price contributes the largest share in the general price index in developing countries. Consequently, the nature of food price dynamics, global and domestic food price and volatility transmission influence the general price inflation. The main objective of the study is to examine food price dynamics and inflation in Sri Lanka for the period of 2003M1-2014M12 by focusing on two perspectives: i) long memory of food price inflation and ii) food price transmission. This study attempts to examine specifically (i) the long memory properties of food price dynamics, (ii) the transmission of global food price dynamics to domestic prices, (iii) the transmission of global food price volatility to domestic prices, and (iv) the spillover effects of domestic food prices on overall consumer price. Rescaled range statistic, Geweke and Porter–Hudak statistic, Local Whittle estimator, autoregressive fractional integrated moving average model and fractional integrated generalised autoregressive conditional heteroscedastic model were used to estimate the long memory parameter of the food price series. Cointegration technique, error correction models, Granger causality analysis, and impulse response function analysis (IRF) were employed to investigate the price transmission effects. The long memory analysis shows that all food price and volatility series possess long memory. The cointegration and causality analysis show that the global food price and volatility transmit significantly to the domestic prices. In addition, the results also reveal that the domestic food prices influence positively and significantly the overall consumer price. IRF analysis also shows that there is a positive shock of global food price on the domestic prices which lasts for longer periods. Hence, the policy makers are recommended to take into account food prices in computing core inflation which is used for monetary policy in Sri Lanka

Australian agricultural restructuring and farmers’ responses: a case study of the Illawarra region, New South Wales

Rural geography has become an increasingly important subdiscipline of human geography since the 1980s. Over the past decades, farming in most developed countries has been transformed at a speed and to an extent that is unprecedented. Much of rural Australia has been experiencing constant financial difficulties which drove the restructuring of agricultural industries. Despite the importance of supporting family farmers and rural communities in terms of food security and sovereignty, there is still very limited theoretical and empirical knowledge regarding how the multiple forces over the past decades have intertwined and impacted farm development pathways. By focusing on dairy farmers‘ (in the Illawarra region, New South Wales) experiences of and responses to agricultural restructuring, this thesis aims to characterise and interpret change in contemporary agriculture. Conceptually, agricultural restructuring has been researched from political economy and socio-cultural perspectives, which have alternately dominated the research agenda of human geography, and are both deployed in this study. Dairy farming dominates Illawarra agriculture, and has been constantly pressured by neoliberal policy reform (especially nationwide deregulation of the dairy industry in 2000), industry restructuring and the inflow of urban middle-class groups into rural areas. To maintain the century-long tradition of family farming, Illawarra dairy farmers do not just work hard but seek to improve their business from various angles. This process drives continued productivism, the rise of alternative agri-food networks, and the multifunctional transition of local agriculture. The thesis brings together scholarship examinng the pathways of agricultural transformation, changing perspectives of farming businesses, and on-farm development