Reference-Dependent Ambiguity Aversion

Mihm, Maximilian. 2011. Reference-Dependent Ambiguity Aversion. Doctoral Dissertation, Cornell University.

This dissertation contributes to the growing literature in economics on ambiguity aversion. I identify an implicit reference-point assumption in the multiple priors model of Gilboa and Schmeidler (1989), generalize their decision theory to allow for stochastic reference-points, and study the market implications of endowment-dependent ambiguity aversion. Chapter 2 identifies the implicit reference-point assumption in the multiple priors model and provides an axiomatic characterization of a reference-dependent multiple priors model. I also provide an axiomatic characterization of a reference-dependent version of the Choquet Expected Utility model of Schmeidler (1989), which can accommodate different attitudes towards ambiguity. Chapter 3 studies the implications of reference-dependent ambiguity aversion when reference points are given by the endowment in an Arrow-Debreu exchange economy. I illustrate that no-trade and underinsurance are robust implications of ambiguity aversion when investors view ambiguity from the perspective of their endowments. Chapter 4 extends the decision model to intertemporal choice problems and studies the effects of reference-dependent ambiguity aversion in the context of a dynamic asset pricing model.

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Three Essays On Monetary Policy In Economies With Financial Frictions

Anand, Rahul. 2010. Three Essays On Monetary Policy In Economies With Financial Frictions. Doctoral Dissertation, Cornell University.

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.

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Essays On The Macroeconomic Effects of Oil Price Shocks On The U.S. Economy

Mukherjee, Romita. 2011. Essays On The Macroeconomic Effects Of Oil Price Shocks On The U.S. Economy. Doctoral Dissertation, Cornell University.

A large volume of research has acknowledged the role of oil price shocks to generate a significant stagflationary impact on U.S. and other oil importing nations. Recent research however shows a paradigm shift in this oil price-macroeconomy relationship since the mid 1980s, during which the U.S. economy has been relatively resilient to oil shocks. Both output contraction and inflationary expectations have been milder in the post mid 1980s than before. But the 2007-08 oil shock episode has re-emphasized the immense impact of the ebbs and flows of oil prices on the U.S. economy’s ups and downs. Global oil price peaked at $148 a barrel in June 2008. With the mortgage crisis and credit crunch, oil was another blow too many. The U.S. economy swamped into one of the greatest recessions of all times. According to Hamilton (2009), the 2007-08 oil shock had a significant contribution to the recent recession. While a lot of work have been done on the effects of oil price shocks on the U.S. economy, relatively little work has investigated what triggers oil price increase. My research illustrates why it is important to study the cause of an oil price rise. First, the effects of oil price rise on the macro variables depend heavily on what causes the shock. Secondly, whereas the oil price hikes of the 1970s and early 1980s can mostly be attributed to exogenous events in OPEC (Arab Oil Embargo, Iran-Iraq War, Iranian Revolution), a significant source of oil price spikes in the post mid 1980 era have been an increase in global oil demand confronting stagnating oil production. From a policy perspective, of course, policies aimed at dealing with higher oil prices must take careful account of what causes oil prices to rise. Empirical research that demonstrates the resilience of U.S. economy to oil price shocks builds on the implicit assumption that as oil price varies, everything else in the global economy is held constant. Thus all variations in oil prices are taken as alike and exogenous. This overlooks the possibility that oil price rise sparked off by diverse events can potentially lead to different repercussions. This thesis is an attempt to develop framework to study the endogenous increase in oil price. The oil price increase arises from increase in U.S. growth rate, increase in foreign growth rate and a purely exogenous oil supply shock by OPEC. The most important result is that the source of oil price rise has changed after the mid 1980s - whereas before the mid 1980s, bulk of the variation in oil price was due to supply shocks by OPEC, post mid 1980s, most of the variation in oil price is explained by increase in U.S. and foreign growth. Furthermore, if the origin of the oil price rise is the same, then the responses of most U.S. macroeconomic variables display remarkable similarity in the pre and post mid 1980s. This result gives us a new way to look at the resilience of the U.S. economic activity to oil price rise since the mid 1980s. The resilience can be explained to a significant extent by the fact that the type of shocks resulting in oil price rise has changed.

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Market Reform And Its Impact On The Price Transmission In The Coffee Supply Chain: A Case Study Of Colombia, Ghana And Ivory Coast

Xavier, Arnold. 2011. Market Reform And Its Impact On The Price Transmission In The Coffee Supply Chain: A Case Study Of Colombia, Ghana And Ivory Coast. Doctoral Dissertation, Cornell University.

Historically, coffee has been an important cash crop in the developing world and a major source of employment, foreign exchange and revenue. However, coffee producers have not always received a very large share of the export price of green coffee. Reasons that are often mentioned are heavy government intervention and high marketing and processing costs. Prior to reforms, government regulation of the domestic coffee markets in the form of fixed producer prices and the monopoly power of the Marketing Boards in Africa put a substantial wedge between the producer price and the world price of coffee by imposing an implicit tax on producers. From the early 1990s onwards, various Structural Adjustment Programmes were introduced in coffee exporting countries. This had direct consequences for the various forms of marketing boards which were prevalent in the coffee and other commodity sectors. In most cases, they were either dissolved or had their powers curtailed. One of the key objectives driving the reforms was to ensure that the farmer received a higher proportion of crop proceeds. Liberalization was envisaged to have a positive effect on producer prices and price transmission signals from world markets to producers. This paper, an Error-Correction Model (ECM), analyses the impact of policy reform in Colombia, Ghana and Ivory Coast. A key question is whether producers of coffee beans received a higher share of the international price after reforms, as was the desired policy outcome. As findings indicate, the reforms induced stronger relationships among domestic and international prices in Colombia, but not in Ghana or the Ivory Coast. The institutional arrangements coordinating the domestic coffee system and contract enforcement may help explain the differences and should be explored further.

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Essays On Economic Cycles

Schumpeter’s line of thought of multiple economic cycles is further investigated. The existence of multiple cycles in economic variables is demonstrated. In basic innovations five different cycles are found. Multiple cycle structures are shown in various macro-economic variables from the United Kingdom, the United States of America and the Netherlands. It is remarkable that the lengths in years of the individual cycles are similar to the Fibonnaci sequence. This relationship has never been found before in the economy. This sequence is well known in the scientific fields of biology, physics and astronomy. It can also be observed in art, music and architecture. The existence of this relationship gives a new perspective on macro- economic relationships and economic growth. The multiple cycle approach is also applied to the Dutch economy. On the basis of a 5 and 11 year cycle present in the Dutch Gross Domestic Product (GDP) a long term forecast model is developed. At the same time a new real time indicator, also known as “nowcast indicator”, of Dutch GDP is developed. This indicator serves as a thermometer of the Dutch economy and is called the “Econometric Institute Current Indicator of the Economy” (EICIE). In contract to most other forecast models, which are much larger, this forecast model is based upon a single equation. The model is based on a single explanatory real variable, namely staffing data from Randstad Staffing Services.

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Empirical Studies on Exchange Rate Puzzles and Volatility

This thesis consists of five empirical studies related to exchange rates. The first two studies deal with the fundamental theory of Purchasing Power Parity (PPP), which postulates that goods in different countries should have the same price when expressed in the same currency. The main conclusion of these studies is that the common use of a methodology with the restriction of homogeneous mean reversion in a panel of real exchange rates can have a dramatic impact on inferences made on the validity of the PPP hypothesis. The third and fourth study focus on the Uncovered Interest rate Parity (UIP), which is another fundamental economic theory. UIP states that the expected change in the spot exchange rate is equal to the forward premium. The linear models used in the third study are unable to capture the dynamics better than the benchmark random walk model. For the nonlinear models in the fourth study, however, UIP can not be rejected. The last study concerns the measurement of the volatility of exchange rates. The parsimonious multivariate Stochastic Volatility model is discussed that is estimated efficiently by using the distributional properties of the range-based volatility measure, which makes use of high and low prices. The estimated currency-specific volatilities that are extracted from the exchange rate volatilities are able to pick up some of the most saliant events in exchange rates. The five studies presented in this thesis offer a number of extended and enhanced empirical models that shed new light on the dynamics and determinants of exchange rates.

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The Economic Lot-Sizing Problem: New Results and Extensions

Wilco van den Heuvel (1979) obtained his master’s degree in Econometrics and Operations Research with honors from Erasmus University Rotterdam in 2002. In the same year he started with his PhD research. His main interests are in Operations Research and in particular in (extensions of) the classical economic lot-sizing problem. His research resulted in five papers published in Computers & Operations Research, European Jour- nal of Operational Research, International Journal of Production Research and Operations Research Letters. Finally, in 2005 he was awarded the Chorafas Prize, a prize to stimulate young researchers.

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Macroeconomic Crisis and Firm Performance

Karen Watkins was born in Costa Rica, on April 15th, 1976. She studied Economics at the University of Costa Rica, and afterwards pursued the MSc in Economics and Finance degree at The University of Warwick, U.K.. Currently she is PhD Candidate in Finance at Erasmus University Rotterdam, The Netherlands. Her research interests are corporate governance, corporate finance, international finance, and health economics. Her academic inclination commenced during 1997, as teacher assistant for Microeconomics courses. Ever since, she has taught at different universities in Costa Rica, Mexico, and The Netherlands. She has been member of the Mexican Academia of Business Administration (ACACIA), and the Latin American and Caribbean Economic Association (LACEA), and has presented her work at several international conferences such as LACEA Annual Congress (both in Madrid and San Jose), and the Infiniti Conference on International Finance (Dublin). Nowadays Karen Watkins is university lecturer and researcher at UPAEP (Puebla, Mexico), as well as researcher for the Merck Company Foundation. She is married and has one child.

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