Macroeconomic impacts: uncertainty shocks and bubbles

Abstract

This dissertation includes three working papers showing my research on the macroeconomic impact of uncertainty and bubbles. The first two papers look at uncertainty shocks in a dynamic stochastic general equilibrium framework, while the last one focuses on economic bubbles and collateral constraints in an overlapping-generations model.

The first paper provides empirical contributions to the uncertainty shock literature by estimating a dynamic stochastic general equilibrium (DSGE) model for the Australian economy. This study aims at distinguishing the impact of uncertainty shocks from structural shocks in driving Australian business-cycle fluctuations from 1981 to 2015. Principally, the model includes a wide range of structural shocks incorporated with time-varying volatility components to quantify the effect of uncertainty shocks on the output variations. Overall, the findings suggest that time-varying volatilities have contributed substantially to the Australian business fluctuations, while major driver factors are attributed to systematical shocks. Domestic policy shocks account for the largest fraction of the GDP variations, while international spillover effects have a negligible fraction in the output movements.

The second paper enriches the empirical research on uncertainty shocks with a multisector model for a small, open economy. With a more refined classification of sources of uncertainty shocks, and separate identification of mining sector and resource-price shocks, the model emphasises the importance of the resource sector in the Australian economy during the mining boom period from 1991 to 2013. The results show that foreign shocks are the most crucial drivers, accounting for more than 50% of the economic variations, while demand and productivity shocks have minimal impacts. Additionally, the shocks are further decomposed into their mean and volatility components. Consequently, time-varying uncertainty shocks are more important than systematic shocks to the fluctuations, with great importance attributes to foreign shocks.

The third paper focuses on rational bubbles and collateral constraints in an overlappinggenerations model with heterogeneous beliefs. The leverage equilibrium and asset-pricing theories are employed to explore the role of leverage in creating and popping bubbles. The study shares similar findings with the rational bubble literature that bubbles cannot exist in a frictionless endowment economy. Other noticeable results emphasise the existing conditions of bubble equilibrium in a fixed-bubble supply environment. First, bubbly equilibrium can endure in high-income countries with highly leveraged financial markets. However, high collateralisation might trigger deleveraging behavior from nervous lenders, causing bubbles to collapse. Second, bubbly equilibrium is prone to exist in low-income countries at any level of collateralisation. The dynamic analysis of bubbly equilibrium with growing bubble supply is more complex and will be tackled outside of this dissertation in the future. Show more