Essays on macroeconomics
Author
Karasoy Can, Hatice Gökçe
Advisor
Lee, Sang Seok
Date
2018-06Publisher
Bilkent University
Language
tr
Type
ThesisItem Usage Stats
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Abstract
This dissertation consists of four essays on macroeconomics with a special emphasis
on monetary economics and corporate finance. It presents empirical evidence
for the floating rate channel in monetary policy transmission, highlighting the
role of debt maturity when measuring cash flow exposure and its association
with future path of policy. It then builds a theoretical model with New Keynesian
properties in which endogenous borrowing constraints are source of amplification
of fundamental shocks. The two blocks of the thesis, both empirical
and theoretical essays, uncover the floating rate channel of monetary policy, with
a comprehensive understanding and interpretation of corporate debt maturity,
nature of repayment structure and forward guidance.
The first essay investigates firm level stock price changes around monetary policy
announcements in an event study framework, and finds that firms that have
issued more floating rate debt see their stock prices affected more. Importantly, it shows that debt maturity is a crucial component of cash flow exposure. The
firms with floating rate liabilities at longer maturities experience steeper fall in
their stock prices. In addition to this, it provides further evidence regarding the
floating rate channel by demonstrating that for the firms which hedge themselves
against interest rate risk, the effect of the policy shock is mitigated. This indicates
financial market sophistication, which is further explored in the form of statistical
tests.
Further, it is the path, or forward guidance component of monetary policy shock
that triggers this channel since this is the aspect of the policy that shapes expectations
about future short rates hence future floating rate debt payments.
The results show that, in the zero lower bound period the floating rate channel
continued to be effective because of forward guidance surprises.
It is shown that this effect is not a result of rule of thumb behavior, and that the
marginal stock market participant actually studies and correctly interprets the
liability side of firm balance sheets. The tests of financial market sophistication,
which are novel, contribute to the empirics of market rationality. Furthermore,
the floating rate exposure at the time of monetary policy surprises predicts future
investment and profitability, verifying the pricing decision and also providing
evidence of another channel for monetary policy, due to financial effects. In
short, this essay provides a detailed analysis of neo-classical monetary policy
transmission involving firm balance sheets and provides a small glimpse of what
lies behind Bernanke and Gertler’s (1995) “black box”.
The second essay provides additional robustness checks and considers alternative
regression model specifications to those in the first essay. This essay discusses
the existence of floating rate channel for samples of different firm size classes,
and for samples including or excluding specific sub-sectors. It shows that for
small-sized firms, the channel is not evident, presumably resulting from the fact
that their access to floating rate debt market is limited. This warrants further
analysis, which will be taken up in the future. It confirms the cash flow effect
and the protective power of hedging increases when the analysis excludes both
financials and utilities sectors. Furthermore, it analyzes various specifications
with additional control variables, time fixed effects, and provides further evidence
for the zero lower bound period.
The third essay builds a simple model in which both short term and long term
debt co-exist. The essay is motivated by empirical papers which show that firms
match their debt maturity structure and asset maturity. The model assumes
that the sector which has long-lived capital is financed by long term debt, and
the sector which has short-lived capital is financed by short term debt. The
simple model provides an environment to discuss the sector-specific effects of the
aggregate shocks and macro-prudential policies.
In the second part of the essay, the simple real model is extended to a New
Keynesian dynamic stochastic general equilibrium model which embeds nominal
frictions due to price stickiness, which creates a role for monetary policy. The
extended model has various policy implications. The impulse response functions
to a similar monetary policy shock show that floating rate debt might be more
disruptive for consumption. Moreover monetary policy is less effective in the
floating rate case. These are in accordance with the findings of floating rate debt
literature.
Moreover it shows that lengthening the maturity of floating rate debt puts long
term debt financed entrepreneurs into a more vulnerable position. This supports
empirical findings in the first and second essay. The specific type of corporate
debt that is used to finance investment, which eventually turns into production,
plays a significant role in determining future cash flows, and that in turn is quite
important for understanding monetary policy transmission.
The fourth essay, which is the final essay of the thesis, is included to fulfill the
publication requirement. It assesses empirically whether consumer confidence indices
contain information about future private consumption growth in Turkey. To
this end, empirical models for quarterly total, durable and nondurable consumption
growth with and without sentiment indicators are presented, and in-sample
forecasts and one-step-ahead out-of-sample forecasts from recursive OLS estimates
are evaluated. It is demonstrated that consumer confidence indices are
informative about consumption, however once other macro economic variables
(e.g., exchange rate, labor income, real interest rate etc.) are included, gains
from them in out-of-sample forecasts decrease significantly. Moreover there is
no clear evidence for either precautionary savings motive or permanent income
hypothesis.
Keywords
Cash Flow Effect Of Monetary PolicyFinancial Frictions
Floating Rate Debts
Interest Rate Risk Hedging
New Keynesian Models With Debt Maturity