Kim, Hyeyoen (2009) Large data sets and nonlinearity : essays in international finance and macroeconomics. PhD thesis, University of Warwick.

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Abstract

This thesis has aimed to investigate whether the information in large macroeconomic data sets is relevant for resolving some of puzzling and questionable aspects of international finance and macroeconomics. In particular, we employ the diffusion indices (DIs) analysis in order to capture the very large data sets into a small number of factors. Applications of factors into conventional model specifications address the following main issues. Using factor-augmented vector autoregressive (FAVAR) models, we measure the impact of the UK and US monetary policy. This approach notably mitigates the ‘price puzzle’ for both economies, whereby a monetary tightening appears to have perverse effects on price movements. We also estimate structural FAVARs and examine the impact of aggregate-demand and aggregate-supply using a recursive long-run multiplier identification procedure. This method is applied to examine the evidence for increased UK macroeconomic flexibility following the UK labour market reforms of the 1980s. For forecasting purpose, factors are employed as ‘unobserved’ fundamentals, which direct the movement of exchange rates. From the long-run relationship between factor-based fundamentals and exchange rate, the deviation from the fundamental level of exchange rate is exploited to improve the predictive performance of the fundamental model of exchange rates. Our empirical results suggest that there is strong evidence that factors are helpful to predict the exchange rates as the horizons becomes more elongated, better than random walk and the standard monetary fundamental models. Finally, we explore whether allowing for a wide range of influences on the real exchange rate in a nonlinear framework can help to resolve the ‘PPP puzzle’. Factors, as determinants of the time-varying equilibrium of real exchange rates, are incorporated into a nonlinear framework. Allowing for the effects of macroeconomic factors dramatically increases the measured speed of adjustment of the real exchange rate.

Item Type:	Thesis or Dissertation (PhD)
Subjects:	H Social Sciences > HB Economic Theory
Library of Congress Subject Headings (LCSH):	Macroeconomics -- Data processing, International finance -- Data processing, Diffusion indexes
Date:	February 2009
Institution:	University of Warwick
Theses Department:	Department of Economics
Thesis Type:	PhD
Publication Status:	Unpublished
Supervisor(s)/Advisor:	Taylor, Mark P., 1958- ; Zhang, Lei, 1963-
Sponsors:	University of Warwick. Dept. of Economics
Extent:	vii, 155 leaves : charts
Language:	eng
URI:	http://wrap.warwick.ac.uk/id/eprint/3747

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