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Essays on macroeconomics

Liao, Junyi (2023) Essays on macroeconomics. PhD thesis, London School of Economics and Political Science.

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Identification Number: 10.21953/lse.00004545


This thesis comprises three chapters on macroeconomics. Chapter 1 studies over/under-reaction and judgment noise in expectations formation. In forecast surveys of aggregate macroeconomic and financial variables, the correlation between forecast errors and forecast revisions is positive at the consensus level, but negative at the individual level. I argue that noise in predictive judgment can account for the difference. Using forecast survey data, I provide evidence that judgment noise is large enough to reconcile the difference between the two coefficients. The structural parameter measuring over-/underreaction mainly points to underreaction, regardless of whether the model matches correlation coefficients at the individual or aggregate level. Chapter 2 looks at adaptive expectations and over-/under-reaction to new information. It is shown that the occurrence of over- or under-reaction using adaptive expectations is contingent on both the weighting parameter used in forecasts and the persistence of the associated actual variable. Furthermore, compared to the generalized diagnostic expectations model, the adaptive expectations framework can better match the under-reaction to new information for several variables, as measured by the correlations between forecast errors and forecast revisions. This advantage stems from the capacity of adaptive expectations to allow varying degrees of stickiness in expectations. Chapter 3 explores the effects of an earnings-based borrowing constraint on longterm productivity growth and employment within an economy characterized by endogenous growth, nominal rigidities, and the presence of a zero lower bound on the nominal interest rate. My findings indicate a bifurcated impact from the tightening of the borrowing constraint, contingent upon the position of the nominal interest rate. Particularly, when the nominal interest rate is at the zero lower bound, the tightening of borrowing constraints displays a neutral impact on growth but surprisingly leads to a rise in employment.

Item Type: Thesis (PhD)
Additional Information: © 2023 Junyi Liao
Library of Congress subject classification: H Social Sciences > HB Economic Theory
Sets: Departments > Economics
Supervisor: Den Haan, Wouter J.

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