UMD Theses and Dissertations
Permanent URI for this collectionhttp://hdl.handle.net/1903/3
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Item PRECAUTIONARY SAVINGS IN SMALL OPEN ECONOMIES(2010) Roitman, Agustin S.; Vegh, Carlos A; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)Emerging markets are more volatile and face different types of shocks, in size and nature, compared to their developed counterparts. Accurate identification of the stochastic properties of shocks is difficult. We show evidence suggesting that uncertainty about the underlying stochastic process is present in commodity prices. In addition, we build a dynamic stochastic general equilibrium model with informational frictions, which explicitly considers uncertainty about the nature of shocks. When formulating expectations, the economy assigns some probability to the shocks being temporary even if they are actually permanent. Parameter instability in the stochastic process implies that optimal saving levels (debt holdings) should be higher (lower) compared to a process with fixed parameters. Imperfect information about the nature of shocks matters when commodity GDP shares are high. Thus, economic policies based on misperception of the underlying regime can lead to substantial over/under saving with important associated costs. Later, I introduce the first example of a particular class of preferences characterized by a negative third derivative and a constant and invariant coefficient of relative prudence in the sense of Kimball (1990). This particular feature enables us to isolate the effect of risk aversion on precautionary savings. Furthermore, I use this particular class of preferences to assess the effects of volatility, risk aversion, interest rates and intertemporal distortions on precautionary savings in finite and infinite horizon models of a small open economy. The effects of risk aversion, intertemporal distortions and interest rates on average assets holdings are qualitatively identical as the ones observed for CES preferences. Using an infinite horizon model I can evaluate the effects of persistence and volatility of shocks on precautionary savings and verify that these are qualitatively identical to the ones observed with CES preferences.Item ESSAYS IN CROSS-COUNTRY CONSUMPTION RISK SHARING(2010) Qiao, Zhaogang; Prucha, Ingmar; Korinek, Anton; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)This dissertation concerns cross-country consumption risk sharing in a long-run perspective. Financial integration, empirically measured by cross-country holdings of assets and liabilities, has increased dramatically in the past two decades. But what can explain the lack of cross-country risk sharing documented in the literature? Chapters 2 and 3 of this dissertation address this question. In Chapter 2, we set up a model to illustrate the mechanical difference between a bond economy and an insurance economy. We show that a bond economy can intertemporally smooth consumption in face of transitory output shocks, but not for permanent output shocks; an insurance economy is essential for risk sharing on permanent shocks. We therefore show that when both transitory and permanent output shocks exist, transitory shocks only create "noise" if the focus of interest is on identifying risk sharing in the long run. In Chapter 3, we specify an empirical nonstationary panel regression model to test long-run consumption risk sharing across a sample of OECD and emerging market countries. This is in contrast to tests in the literature which are mainly about risks at business cycle frequency. We argue that these existing tests neglected the permanent elements of risks that are of interest and that their model specifications were not rich enough to accommodate heterogeneous short-run dynamics. Since our methodology focuses on identifying cointegrating relationships while allowing for arbitrary short-run dynamics, we can obtain a consistent estimate of long-run risk sharing while disregarding any short-run nuisance factors. Our results show that, for the period of 1950-2008, the level of long-run risk sharing in OECD countries is similar to that in emerging market countries. However, during the financial integration episode of the past two decades, long-run risk sharing in OECD countries increased more than in emerging market countries. Furthermore, we investigate the relationship between various measures of financial integration and cross-country risk sharing, but only find weak evidence of such linkages.