Analyzing The Effects Of News Shocks And Monetary Policy On Business Cycles And Contagion

The aim of this research is manifold.The first is to study the impact of news shocks on business cycle's fluctuations by using different vintages of Total factor productivity(TFP)series for the data derived from the United States(US)which spans from 1960:Q1 to 2007:Q3;and the other,recent,vintage of the TFP series was produced on November 12,2015.The second aim is to study the impact of transmission of monetary policy shocks on major economic and financial variables over different horizons in the business cycle.The third aim is to identify interdependencies and contagion from an advanced country(such as US)to the emerging Asian countries during the recent global financial crisis using different econometric frameworks,including the most recent approach of a time series-based macro-econometric framework.Forces behind economic fluctuations and transmission of these fluctuations have fueled fierce debate in recent years of financial instability,just as they did about 75 years ago in the midst of the great depression.In modern business cycle models,fluctuations in business cycle are generated from changes in fundamentals,like changes in monetary policy,technology,preferences,and government policy.The hypothesis that news shocks and monetary policy shocks can be a source of economic fluctuations has been well recognized in the past.Overall,with regard to news shocks,a significant body of literature has identified the significance of news shocks as a major source of fluctuations in business cycle.However,there is a significant dearth of literature on news shocks that identifies the role of data revisions and their impact on business cycle fluctuations and which of consumer confidence,stock price data,or term structure data account for the major share of forecast error variance of total factor productivity and output due to news shock.With regard to monetary policy shocks,its effects on business cycles and capital markets.There are many questions that need to be addressed for example,to what extent is monetary policy effective in controlling inflation of the price of food?How does agricultural productivity react to contractionary monetary policy shocks?The global reach of recent crises and the potential damaging consequences of being affected by contagion have ignited debate in the monetary policy and financial contagion literature about two main questions.First,how do monetary policy shocks result in global imbalances and contagion?Second,do financial market co-movements between the US and other countries result in contagion effects?As monetary policy transmission has changed over time,so has its impact varied with different horizons.Conventional measures might not be good indicators of contagion effects.To answer the research questions,the following three analyses are undertaken.First,this study revisits news shocks to identify the role of different vintages of total factor productivity(TFP)series and term structure of interest rates as major prognosticators of future economic growth.This study re-estimates Barsky and Sims'(2011)empirical analysis by employing the 2007 and 2015 vintages of TFP data.I find substantial quantitative as well as qualitative differences among impulse response functions when using 2007 and 2015 vintages of TFP data.By including term structure data in our vector autoregression specification,total surprise technology shocks and news shocks account for 97 and 92 percent of the forecast error variance in total TFP and total output,respectively.We find that revisions in TFP series over time ultimately impact the results for news shocks on business cycles.Second,this study analyzes the impact of macroeconomic policy(i.e.,monetary policy)on employment,food inflation,and agricultural growth by analyzing the extent to which monetary policy is effective in controlling food price inflation;the effect of contractionary monetary policy on the agricultural sector's employment and productivity;and the extent of monetary policy transmission to money market rates and 10-year interest rates.We do so by applying the factor-augmented vector autoregressive model proposed by Bernanke et al.,(2005)to agricultural data from 1995 and 1996 to 2016 for India and Pakistan,respectively.We find that tight monetary policy significantly reduced food inflation and agricultural production while increasing the rural unemployment rate.Money market rates(short-term)and 10-year interest rates increased owing to the contractionary monetary policies pursued by both India and Pakistan.Finally,the third study analyzes monetary policy shocks and contagion.A comparative analysis is undertaken using a dynamic conditional correlation multivariate generalized autoregressive conditional heteroscedasticity model to study the linkages of US monetary policy and liquidity stress funding,as well as higher volatility with emerging countries' stock,money,and sovereign bond markets during 2008-2009,the period of the global financial crisis.We find strong evidence of financial market linkages between US and emerging Asian markets.My empirical results on the intra-regional level tend to confirm this finding.In Asia,Hong Kong has a greater influence on mainland China's money and stock markets than does the US,signifying greater linkages among these Asian markets.This can be explained partly by the rising share of intra-regional trade and investment,lower reliance on the US,and greater common monetary policy in Asia.