http://hdl.handle.net/1721.1/7598 Tue, 18 Jun 2013 17:55:43 GMT 2013-06-18T17:55:43Z http://hdl.handle.net/1721.1/79209 Essays on international macroeconomics Rees, Daniel Morgan This thesis examines the impact of terms of trade shocks on commodity-exporting small, open economies. The first chapter examines whether households, firms and policymakers in these economies can distinguish between temporary and permanent commodity price shocks. I find that they are largely unable to do so. In fact, my model suggests that the expected future path of commodity prices following a temporary price shock is almost identical to the expected future path of commodity prices following a permanent price shock. However, I also find that these information frictions reduce the magnitude of business cycle fluctuations, contrary to popular belief. In the second chapter I describe optimal monetary policy in an environment where agents cannot directly observe whether commodity price shocks are temporary or permanent and where an economy's non-commodity sector features a learning-by-doing externality. I find that under optimal monetary policy the non-commodity sector contracts by more during a transitory commodity price boom under incomplete information than it does under full information, but by less during a permanent boom. I also examine the performance of simple monetary policy rules. A policy of responding strongly to deviations of home-produced goods inflation from target with a modest response to changes in the nominal exchange rate comes close to replicating the welfare outcomes of optimal policy. In contrast, an exchange rate peg generally produces large welfare losses. The third chapter, co-authored with my classmate Patricia Gomez-Gonzales, examines the consequences of changes in the volatility of commodity price shocks on commodity exporters. We first demonstrate the existence of time-varying volatility in the terms of trade of a selection of commodity-exporting small open economies. We then show empirically that increases in terms of trade volatility trigger a contraction in domestic consumption and investment and an improvement in the trade balance in these economies. Finally, we construct a theoretical model and demonstrate that it can replicate our empirical results. Thesis (Ph. D.)--Massachusetts Institute of Technology, Dept. of Economics, 2013.; Cataloged from PDF version of thesis.; Includes bibliographical references (p. 167-174). Tue, 01 Jan 2013 00:00:00 GMT http://hdl.handle.net/1721.1/79209 2013-01-01T00:00:00Z http://hdl.handle.net/1721.1/77874 Optimal intertemporal decisions in imperfect capital markets Cardenas, Ruben Ojeda Optimal intertemporal investment solution paths are derived for both, firms operating in perfect financial markets and those facing credit constraints, due to imperfect capital markets. However, as in these markets, saving and investment decision may not be separable, we obtain the optimal dynamic path of these decisions for agents that own capital but do not have any access to credit and extend the analysis when these agents have some access to credit but yet face credit constraints from financial intermediaries. We next consider agents without physical capital and who derived their income from wages and/or financial assets. We study their optimal intertemporal decisions, among, consumption, financial assets and durable goods, first under perfect capital markets and then when credit constraints are present. The above results may be useful for both, the comparative dynamic analysis of agents with different type of endowments and immersed in imperfect financial markets and also to derive, from micro foundations, the aggregate demand and supply functions of intertemporal macro models for developing economies. The distinction between different types of agents according to their endowment may also help to assess the wealth and income distribution implications of economic policy. Thesis (S.M.)--Massachusetts Institute of Technology, Dept. of Economics, 2012.; Cataloged from PDF version of thesis.; Includes bibliographical references. Sun, 01 Jan 2012 00:00:00 GMT http://hdl.handle.net/1721.1/77874 2012-01-01T00:00:00Z http://hdl.handle.net/1721.1/77873 Essays on financial economics Vargas Mendoza, Alberto This thesis consists of three independent essays on Financial Economics. In chapter one I investigate the possible mispricing of European-style options in the Mexican Stock Exchange. The source of this problem is that when the Mexican Stock Exchange introduced options over its main index (the IPC) in 2004, it chose Heston's (1993) "square root" stochastic volatility model to price them on days when there was no trading. I investigate whether Heston's model is a good specification for the IPC and whether more elaborate models produce significantly different option prices. To do so, I use an MCMC technique to estimate four different models within the stochastic volatility family. I then present both classical and Bayesian diagnostics for the different models. Finally, I use the transform analysis proposed by Duffie, Pan and Singleton (2000) to price the options and show that the prices implied by the models with jumps are significantly different from those implied by the model currently used by the exchange. Next, I turn to a problem in behavioral portfolio choice: It has been shown that the portfolio choice problem faced by a behavioral agent that maximizes Choquet expected utility is equivalent to solving a quantile linear regression. However, if the agent faces a vast set of assets or when transaction fees are considerable, it becomes optimal for the agent to take non-zero positions on only a subset of the available assets. Thus, in chapter 2, I present a portfolio construction procedure for this context using Li penalized quantile regression methods and explore the performance of these portfolios relative to their unrestricted counterparts. In chapter three, co-authored with Victor Chernozhukov, we present the Extended Pareto Law as an alternative for modeling operational losses. Through graphical examination and formal goodness of fit tests we show that it outperforms the main parsimonious alternative, Extreme Value Theory, in terms of statistical fit. Finally, we show that using the Extended Pareto Law as a modeling technique also leads to reasonable capital requirements. Thesis (Ph. D.)--Massachusetts Institute of Technology, Dept. of Economics, 2012.; Cataloged from PDF version of thesis.; Includes bibliographical references. Sun, 01 Jan 2012 00:00:00 GMT http://hdl.handle.net/1721.1/77873 2012-01-01T00:00:00Z http://hdl.handle.net/1721.1/77797 Empirical essays on firm behavior in India Ryan, Nicholas (Nicholas James) In this thesis, I study the behavior of industrial firms in India in the electricity market and with respect to locational choice and environmental regulation. In the first chapter, I study the competitive effects of transmission infrastructure on market outcomes in the Indian day-ahead electricity market. Transmission constraints may increase local market power by limiting competition across regions. I find that bidders in import-constrained regions do raise bid prices in response to congestion and I simulate the effects of relaxing transmission constraints using a structural model of power-market bidding. The welfare gain from infrastructure expansion is large as a share of market surplus and mostly due to the strategic responses of bidders to a better-integrated market. In the second chapter, I study the agglomeration of manufacturing activity in India. Industry in India is shown to be spatially agglomerated to an extent similar to that observed in the United States and perhaps slightly greater. All the Marshallian forces of linkages in goods, labor and ideas between industries are important for industrial colocation, with hiring similar workers the strongest predictor of coagglomeration patterns. Finally, in the third chapter, my advisors, Esther Duflo and Michael Greenstone, Rohini Pande and I measure the effects of auditor independence on the reliability of reports by third-party environmental auditors and the regulatory compliance of the firms they audit, using a field experiment. We find that a reformed audit system in which auditors were randomly assigned to plants, monitored and given incentives for accuracy greatly improves the accuracy of auditor reporting, as measured by independent backchecks of true pollution levels. Moreover, the treatment plants subject to greater scrutiny under the reformed audit system responded by reducing pollution output relative to the control group. Thesis (Ph. D.)--Massachusetts Institute of Technology, Dept. of Economics, 2012.; Cataloged from PDF version of thesis.; Includes bibliographical references (p. 143-149). Sun, 01 Jan 2012 00:00:00 GMT http://hdl.handle.net/1721.1/77797 2012-01-01T00:00:00Z