Essays on uncertainty
Author(s)
Advisor
Date
2015Publisher
Bilkent University
Language
English
Type
ThesisItem Usage Stats
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Abstract
This dissertation consists of three essays on the real impacts of uncertainty
shocks. The first essay develops a theoretical model to investigate the impact
of financial market uncertainty on real economic downturns. The second and
third essays empirically investigate the differences in the adverse impact of
uncertainty shocks on real output for countries with different financial development
levels and central bank characteristics.
The first essay investigates whether financial market volatility induces real
downturns in a dynamic stochastic general equilibrium framework with heterogenous
agents. In the model, an increase in the volatility of future stock
price expectations of nonsophisticated agents causes an increase in the volatility
of stock prices. In response to the increase in stock price volatility, the
model generates reduction in consumption, investment, employment and output.
The model contributes to the literature by modeling financial market
volatility in a general equilibrium framework, highlighting the mechanisms
through which the impact works, and providing estimates of its magnitude.
The second essay investigates whether financial development moderates
the negative impact of uncertainty shocks on real economic activity. To test
this conjecture, I compare the impact of macro level uncertainty as measured
by stock market volatility on real GDP growth for countries with different
financial development levels. To address potential endogeneity concerns, the
estimation is made using Two Stage Least Squares technique where plausibly
exogenous disaster shocks are used as instruments for stock market volatility.
The estimation results based on a panel data set of 54 countries between
1971 and 2009 are consistent with the conjecture that uncertainty shocks hurt
countries with developed financial markets less.
The third essay investigates the role of institutional characteristics of the
central banks in moderating the negative consequences of uncertainty shocks
using the same identification strategy as the second essay. The results provide
strong evidence that central bank independence reduces the adverse effects of
uncertainty shocks. As for the impact of central bank transparency, while in
some specifications the results support its mitigating impact on the adverse
effect of uncertanity, in others it doesn’t have a significant moderating impact.
In the light of the restrictions on the transparency data set which spans 44
countries between 1998 and 2009, more comprehensive studies may be needed
to reach a stronger verdict for its impact.
Keywords
UncertaintyVolatility Shocks
Financial Market Volatility
Business Cycles
Financial Development
Central Bank Independence
Central Bank Transparency