Three Essays in Macroeconomics
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Chapter 1 – The Transmission of the US Stock Market Crash of 2008 to the European Stock Markets: An Applied Time Series InvestigationThis study investigates the direction and magnitude of the financial links between the European stock markets and the U.S. stock market before, during, and after the stock market crash of 2008, with an emphasis on the Central European countries. Our dataset consists of daily data for the S&P 500 and the EURO STOXX 50 indexes from January 2000 to May 2013, and also a new index which has been defined to measure the Central European countries stock market prices. The results show that there is an immediate response of the European markets to a price change in the U.S. stock market while the reverse relationship takes longer to develop. After the financial crisis, the bilateral relationship happens in a shorter period of time. We show that although the Central European stock markets are segmented from the U.S. market before the crisis, they become linked during the crisis and stay connected even after the crisis. Also, the quantitative results of the study show a significantly higher impact of the U.S. stock market on the Europe stock markets during the recent financial crisis, while this effect is decreasing after the crisis.Chapter 2 - A Descriptive Growth Model with UnemploymentThe standard descriptive growth model is modified in a straightforward way to incorporate what Keynes (1936) called the “essence” of his general theory. The essence is the idea that exogenous changes in investment cause changes in employment and unemployment. We capture this idea by assuming the path for the capital growth rate is exogenous in the growth model. The result is a dynamic model comparable to the IS-model of static macro theory. Testing the model using post-WWII U.S. data, we show our model well explains both the long term growth trend and fluctuations in unemployment around the trend. Chapter 3 - Bounded Rationality and AmbiguityThis paper examines the results of a preference experiment aimed at examining the ability of people to distinguish a better uncertain prospect from a worse uncertain prospect when the difference between the two is the probability distribution. This tests the extent to which human subjects perceive ambiguity because of limited cognitive capacity even though there is no ambiguity as ambiguity is normally defined. We found that subjects did, for the most part, place a higher value on better prospects – Cognitive ability to distinguish. However, an evidence of ambiguity was found due to the common and not rare valuation errors. By moving to ambiguity, bids were increased when max was high (more optimism) and decreased when max was low (more pessimism).