Essays on uncertainty and real economic fluctuations

Abstract

This thesis focuses on an exhaustive theoretical and empirical scrutiny of the dynamic
interdependence between uncertainty and real economic fluctuations. It consists of
three main chapters, along with the first introductory chapter.

In the second chapter we propose an analytical framework to study the cointegration
relationship between economic uncertainty (various measures) and financial, as well
as macroeconomic variables. This chapter contribution builds on establishing a theory driven analytical framework to demonstrate that a shock to uncertainty can change
the equilibrium behaviour of financial and macroeconomic aggregates. An economic
system may display heterogenous cointegration structure at various points in the distribution of the growing variable, pointing to the possibility of multiple-steady states
and condition-specific policy intervention, rather than being conventionally assumed
and estimated. Consequently, another innovation of this chapter is to test and identify
the possibility that a heterogenous cointegration relationship may exist across the
distribution of the financial/macroeconomic variables, and not only their mean. By
employing the recently developed quantile autoregressive distributed lag (QARDL)
model to our setting, our empirical examination in the case of the USA confirms that
there exist varied speeds of adjustment across different points of the distribution of the
economic system.

The third chapter seeks to expand our perception of the impact of economic uncertainty
on the growth of macroeconomic variables. In this chapter we exploit long-memory
properties in a vector time series to characterize quantitatively important interdependence dynamics between measures of uncertainty and real economic variables. We estimate the impact of this relationship in a system where a shock in these variables
has a tendency to converge slowly to the long-run equilibrium, rather than as conventionally predicted or assumed in recent literature. Employing fractionally cointegrated vector autoregressive (FCVAR) model for selected macroeconomic variables and two measures of uncertainty, we find that the dynamic responses of output, employment and stock price to such shocks in uncertainty are negative on average.

In the fourth chapter, we expand our investigation of the uncertainty-economic/financial
variables relationship. Specifically, we investigate the dynamic interdependence of the
determinants of money demand over time in response to economic uncertainty. We are
looking for the chances of a stable money demand, given the fluctuation in persistent
uncertainty. In addition, we model the possibility of slow or fast convergence to the
steady state of equilibrium of money demand in reaction to uncertainty shocks. Being
able to recognize the nature of persistence in uncertainty could lead us to a deeper
understanding of the way system interacts with different speeds of convergence of uncertainty shock.

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Identifiers

ORCID for Tapas Mishra: orcid.org/0000-0002-6902-2326

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