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Essays on Macroeconomics /

Record Type:	Electronic resources : Monograph/item
Title/Author:	Essays on Macroeconomics /Masayuki Okada.
Author:	Okada, Masayuki,
Description:	1 electronic resource (176 pages)
Notes:	Source: Dissertations Abstracts International, Volume: 87-03, Section: A.
Notes:	Advisors: Lagos, Ricardo Committee members: Borovicka, Jaroslav; Venkateswaran, Vaidyanathan; Gertler, Mark; Boar, Corina.
Contained By:	Dissertations Abstracts International87-03A.
Subject:	Finance.
Online resource:	http://pqdd.sinica.edu.tw/twdaoapp/servlet/advanced?query=31931788
ISBN:	9798293887705

Essays on Macroeconomics /
Okada, Masayuki,

Essays on Macroeconomics /Masayuki Okada. - 1 electronic resource (176 pages)

Source: Dissertations Abstracts International, Volume: 87-03, Section: A.

Chapter 1 studies optimal monetary and fiscal policy when the Treasury is unable to provide fiscal backing to the central bank. The Treasury levies taxes and issues bonds. The central bank issues reserves for its liquidity value and pays interest expenses on reserves, but transfers from the Treasury are constrained. This lack of fiscal backing has implications for monetary and fiscal policy. On the monetary side, the central bank tolerates higher inflation in response to negative productivity shocks, because the central bank optimally chooses a lower nominal interest rate. On the fiscal side, the volatility of the distortionary tax on sales is higher over the business cycle, because the central bank retains its earnings and transfers less to the Treasury. Moreover, this difference due to the lack of fiscal backing is exacerbated by the level of reserves and the size of the shock.Chapter 2 investigates the monetary policy announcement premium by focusing on the intest rate uncertainty and heterogeneity of asset durations. First, the average returns of long-maturity Treasury bonds are higher than those of short-maturity bonds on monetary policy announcement days. Second, the average returns of long-duration equities are statistically indistinguishable from those of short-duration equities on announcement days, whereas on non-announcement days, long-duration equities yield lower returns. This term structure on announcement days is attributed to the resolution of interest rate uncertainty, as measured by the option-implied volatility of Eurodollar futures. I find that the elasticity of returns to changes in interest rate uncertainty is higher for long-duration assets than for short-duration assets, a result that holds for both bonds and equities. This paper highlights interest rate uncertainty in driving the announcement premium, a factor that has been underemphasized in previous research, which has primarily focused on cash flow uncertainty.Chapter 3 proposes a novel mechanism to explain why large firms exhibit disproportionately strong stock price responses to monetary policy surprises. Empirically, we identify an endogeneity issue from the Fed's response-to-news channel that disproportionately affects large firms. To account for this, we develop an asset pricing model with granular-origin aggregate fluctuations and investors' imperfect knowledge of monetary policy rules. The model shows that belief revisions about the policy stance drive both monetary policy surprises and heterogeneous stock price movements through stochastic discount factor adjustments---even in the absence of investor heterogeneity or differential effects of policy shocks on firm fundamentals.

English

ISBN: 9798293887705Subjects--Topical Terms:

183252
Finance.
Subjects--Index Terms:

Fiscal backing

Essays on Macroeconomics /
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520 $a Chapter 1 studies optimal monetary and fiscal policy when the Treasury is unable to provide fiscal backing to the central bank. The Treasury levies taxes and issues bonds. The central bank issues reserves for its liquidity value and pays interest expenses on reserves, but transfers from the Treasury are constrained. This lack of fiscal backing has implications for monetary and fiscal policy. On the monetary side, the central bank tolerates higher inflation in response to negative productivity shocks, because the central bank optimally chooses a lower nominal interest rate. On the fiscal side, the volatility of the distortionary tax on sales is higher over the business cycle, because the central bank retains its earnings and transfers less to the Treasury. Moreover, this difference due to the lack of fiscal backing is exacerbated by the level of reserves and the size of the shock.Chapter 2 investigates the monetary policy announcement premium by focusing on the intest rate uncertainty and heterogeneity of asset durations. First, the average returns of long-maturity Treasury bonds are higher than those of short-maturity bonds on monetary policy announcement days. Second, the average returns of long-duration equities are statistically indistinguishable from those of short-duration equities on announcement days, whereas on non-announcement days, long-duration equities yield lower returns. This term structure on announcement days is attributed to the resolution of interest rate uncertainty, as measured by the option-implied volatility of Eurodollar futures. I find that the elasticity of returns to changes in interest rate uncertainty is higher for long-duration assets than for short-duration assets, a result that holds for both bonds and equities. This paper highlights interest rate uncertainty in driving the announcement premium, a factor that has been underemphasized in previous research, which has primarily focused on cash flow uncertainty.Chapter 3 proposes a novel mechanism to explain why large firms exhibit disproportionately strong stock price responses to monetary policy surprises. Empirically, we identify an endogeneity issue from the Fed's response-to-news channel that disproportionately affects large firms. To account for this, we develop an asset pricing model with granular-origin aggregate fluctuations and investors' imperfect knowledge of monetary policy rules. The model shows that belief revisions about the policy stance drive both monetary policy surprises and heterogeneous stock price movements through stochastic discount factor adjustments---even in the absence of investor heterogeneity or differential effects of policy shocks on firm fundamentals.
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