Theses and Dissertations from UMD
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Item The Language of Central Banking: Probing Global Monetary Policy Communications Spillovers and Central Bank Shocks with Natural Language Processing Tools and a Novel Text Database(2024) Baird, Cory; Swagel, Phillip; Public Policy; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)The discipline of macroeconomics relies mainly on structured data for empirical research, despite unstructured text data being vastly more abundant. This text data, particularly central bank communications, holds untapped potential for monetary economics research due to their influence on market expectations and policy outcomes like inflation. To help guide monetary policy researchers in exploring the growing universe of text data, this research lays out a foundational framework, both in terms of coding infrastructure and Natural Language Processing (NLP) methods. The first step in building out this infrastructure is through the creation of a new open-source central bank text database consisting of monetary policy communications from 14 countries consisting of 2,418 monetary policy statements. I leverage this novel database to explore the literature on "information effects," which has mainly relied on structured data for empirical analysis despite the possibility that the phenomenon itself is attributable to the linguistic elements or sentiment expressed via central bank communications. Chapter 1 (The Anatomy of a Central Bank Statement and Information Shocks) details the steps necessary to create a reproducible and scalable database of monetary policy statements from a diverse group of countries using the latest open source technologies and modern data science practices. I find that positive co-movement between policy rates and equities (what the literature defines as an "information shock") is a common event, with almost half of all policy rate increases (decreases) occurring alongside higher (lower) equity prices. With linguistic regressions and part-of-speech annotations, I provide novel linguistic evidence that information shocks are likely related to both the future state of the economy \parencite{nakamura2018high} and inflation expectations \parencite{boehm2021beyond}. Chapter 2 (Sentiment Analysis-From Past to Present) develops a novel approach for extracting sentiment at the sentence level using cutting-edge transformers models, the architecture behind many large language models (LLMs). My research demonstrates that transformer models as well as the traditional lexical methods employed in the economic literature, can produce starkly divergent results when applied to the same monetary policy statement. This highlights the critical need to utilize multiple sentiment measures to ensure the robustness of any findings derived from textual analysis. Reinforcing the linguistic evidence from Chapter 1, I show that positive (negative) sentiment is associated with positive (negative) information shocks providing further evidence the shocks are driven by the language of the statement itself. I also show that positive sentiment is associated with higher GDP growth in the quarters following a monetary policy statement. Chapter 3 (Central Bank Shocks and Global Spillovers), aggregates sentiment measures from the previous chapter to produce what I call the Global Policy Stance (GPS). I find that the GPS, led by the U.S., Japan, and Switzerland, tends to co-move with the global financial cycle (Global Asset Prices Factor from \textcite{miranda2020global}). I also find that domestic sentiment, rather than U.S. or global sentiment, is predictive of future policy rate changes suggesting that markets may be more sensitive to the communications of the home country's central bank. This thesis sets a rigorous standard for database transparency and code reproducibility above and beyond what is standard practice in the economics literature today. I will publicly release the codebase encompassing data retrieval, cleaning processes, figure generation, model development, all of which were produced utilizing the open-source Python programming language. Through this public release, I will provide researchers with valuable coding infrastructure that supports the operationalization of best practices in data management, enabling (1) the creation of open-source databases fostering collaboration and automation, as well as (2) the development of reproducible, scalable algorithms for text classification and text cleaning processes. In the future, I intend to further build out the central bank database to include other types of monetary policy communications (e.g., minutes and speeches) while also separately maintaining a repository of text classification algorithms (e.g. positive and negative sentiment) including lexical dictionaries from the literature as well as fine-tuned transformer models.Item Essays on Firm Dynamics and Macroeconomics(2023) Kim, Seula; Haltiwanger, John; Shea, John; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)This dissertation describes a broad set of topics in firm dynamics and macroeconomics, including young firm dynamics, business dynamism, firm innovation, technological advance, and economic growth in the U.S. economy. In Chapter 1, I study how workers’ uncertain job prospects affect young firms’ pay and employment growth, and quantify macroeconomic implications. Building a heterogeneous-firm directed search model in which workers gradually learn about permanent firm productivity types, I find that the learning process creates endogenous wage differentials for young firms. In the model, a high performing young firm must pay a higher wage than that of high performing old firms, while a low performing young firm offers a lower wage than that of low performing old firms, to attract workers. This is because workers are unsure whether the young firm’s performance reflects its fundamental type or a temporary shock given the lack of track records. I find that these wage differentials affect both hiring and retention margins of young firms and can dampen the growth of high-potential young firms. Furthermore, the model indicates that higher uncertainty about young firms results in bigger wage differentials and thus hampers overall young firm activity and aggregate productivity. Using employee-employer linked data from the U.S. Census Bureau and regression specifications guided by the model, I provide empirical support for the novel predictions of the model. Chapter 2 studies the effect of competition on firm innovation by developing a discrete-time endogenous growth model where multi-product firms do two types of innovation subject to friction in technology spillovers. Firms improve their existing products through internal innovation while entering others’ product markets through external innovation. We introduce a novel friction, which we label as imperfect technology spillovers, which refer to frictions in learning others’ technology in the process of external innovation. In contrast to existing models, this friction allows incumbent firms to defend themselves from competitors by building technological barriers through internal innovation. Using firm-level data from the U.S. Census Bureau integrated with firm-level patent data, we find regression results consistent with the model predictions. Our counterfactual analysis shows that rising competition by foreign firms leads domestic incumbent firms to undertake (i) more (less) internal innovation for the products in which they have (do not have) a technological advantage, and (ii) less external innovation. This compositional change in firm innovation affects overall innovation in the aggregate economy in different directions depending on the costs of external innovation. Specifically, the shift in innovation composition in response to rising competition decreases overall innovation in the U.S., but would increase overall innovation in an economy with high external innovation costs. Lastly, Chapter 3 examines how increasing knowledge complexity and the accompanying rise in innovation cost affect firm innovation patterns and business dynamism in the U.S. economy. Using detailed firm-level data from S&P’s Compustat and the U.S. Census Bureau, integrated with the U.S. patent database (USPTO PatentViews), we document the increasing trend in knowledge complexity in firm innovation activities. Specifically, the inventor team size, the number of technology types (technology subclasses), and the degree of interdependence across different technology subclasses associated with firms’ patent portfolio have been increasing over time. Furthermore, we find the increasing trend of knowledge complexity is associated with the declining trend of business dynamism, such as firm entry, the share of young firms, and young firms’ activity in job creation and reallocation. We offer a simple endogenous growth model in which different R&D inputs are interdependent (complementary) to each other and firms are required to use different types of inputs to generate a given amount of innovation. This increases more complexity in firm innovation process and makes small, young firms with less knowledge base more difficult to conduct innovation as before. This can impede firm entry and dampen the growth of small and young firms.Item Essays on Frictions and Economic Fluctuations(2019) Yu, Hsuan; Shea, John; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)I study how information frictions, in the forms of limited information capacity or asymmetric information, affects the firm's production and physical capital accumulation decisions, and how it can help a dynamic general equilibrium model to account for selected empirical characteristics over business cycle frequencies. In the first chapter, I explore how limited information capacity affects fished-good inventory accumulation by firms. I use rational inattention to understand the responses of inflation and output inventories after nominal shocks. In the data, output inventories move less than sales in the U.S. manufacturing and trade sectors. To reconcile the model with the data, some studies have suggested that variation in price markups, rather than cost rigidities, must account for the bulk of the real effects of nominal shocks. I propose that this conclusion does not necessarily hold when the firm’s decisions are affected by an information capacity constraint. In my model, firms observe aggregate conditions with idiosyncratic noise. Paying more attention helps a decision maker to reduce the noise, but also incurs information costs. Firms allocate their attention between pricing and production decisions, and their decision rules deviate from the first-best rules. This friction serves as a force to hinder drastic movements in production and inventory accumulation. I show that inventories can move less than sales even when the marginal cost of production is rigid. Numerical results suggest that inattention on the firm side can qualitatively match empirical impulse responses and business cycle moments. The fit with data is better than a staggered pricing model with elastic cost pressure, in terms of both matching impulse responses and simulated moments. In the second chapter, I study how information asymmetry about the quality of used capital affects capital reallocation. Empirical studies of business cycle dynamics indicate that the reallocation of capital, or the movement of capital input from less productive firms to more efficient firms, is procyclical, whereas the dispersion of marginal product of capital is countercyclical. I build a model of endogenous partial capital irreversibility, which stems from both capital specificity and information asymmetry in the market for used capital. The resale price and average quality of used capital in the market vary with aggregate productivity shocks. In the model, imperfect substitution between new and used capital and information asymmetry interact to generate procyclical reallocation. Preliminary numerical results show procyclical reallocation and countercyclical dispersion of capital returns.Item Essays on Firm Dynamics, Local Financial Markets, and the Business Cycle(2018) Blackwood, Glenn Jacob; Haltiwanger, John; Kalemli-Ozcan, Sebnem; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)In this dissertation, I explore the relative importance of financial markets for businesses on both firm-level and aggregate outcomes. In my second chapter, I find empirically that local banking conditions are important for firm-level outcomes, in particular for old and small firms. This finding has two implications, each of which I explore in my second and third chapter, respectively. First, the differential effect across firm age and size suggests sensitivity to financial conditions, or at least to certain financial mechanisms, is correlated with firm characteristics tightly linked with growth (age) and productivity (size). In the quantitative section of my second chapter, I develop a model that is consistent with this differential impact, while at the same time capturing the extreme sensitivity of young businesses to housing prices during the Great Recession. Second, the importance of local banking markets is confirmation of the importance of geographic segmentation. While recent literature has focused on misallocation induced by financial shocks on misallocation within a geographic location, this finding suggests the potential for misallocation across geographies in the context of the United States. In my third chapter, I develop a framework for investigating the relative importance of misallocation within and across geographies, and I explore different types of shocks considered in the literature. I focus on the impact on labor productivity dispersion, which can be directly attributed to misallocation induced by financial frictions in my framework.Item ESSAYS ON THE ROLE OF THE SOVEREIGN IN INTERNATIONAL FINANCE(2016) Moreno Soto, David Nicolas; Kalemli-Ozcan, Sebnem; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)This dissertation investigates the role that the sovereign plays in the international economy, from two different aspects: the first chapter deals with the important role that institutional quality plays in the official accumulation of net foreign assets in emerging-market and developing economies, using a small-open economy model to account for the variation shown across economies in this regard; the second chapter shows the effects that the European Sovereign Debt Crisis that followed the Great Recession has had in the depressed investment rates in small and large firms in the euro area. The first chapter shows that institutional quality has an important role in explaining differences in net sovereign foreign asset position and sovereign risk, while highlighting the importance of mercantilist strategies, understood as the strategies governments follow to exploit growth externalities in their tradable sectors. This frameworks allows the understanding of the vast accumulation of foreign assets that emerging-market and developing economies' governments have amassed during the current period of globalization, which has played a key role in generating the global imbalances. The second chapter focuses on the advanced economies of the euro area, showing how increased sovereign risk depresses investment in the corporate sector through the bank balance-sheets. Using an enormous dataset linking firm, banks, and sovereigns, it can identify the effects that corporate overhang and rollover risk have in deterring firms from investing, and how sovereign risk worsen this problems but making difficult for firms to keep borrowing necessary for investment. This dataset includes many small firms, which are dependent on internal and banking sources of financing, as opposed to large firms, which can diversify and raise additional resources through issuance of bonds and stocks.Item Credit and Liquidity in the Macroeconomy(2015) Kreamer, Jonathan; Korinek, Anton; Shea, John; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)This dissertation studies the role of credit and liquidity in macroeconomic fluctuations. Chapter 1 analyzes the effect of endogenous unemployment risk on the dynamics of recovery from a liquidity trap. In a liquidity trap, an adverse demand shock raises unemployment and produces a period of slow hiring. Slow hiring further reduces demand, both for standard precautionary reasons and because credit conditions endogenously worsen, reducing households' ability to borrow and consume. Multiple equilibrium paths exist, and which one the economy follows depends on household expectations and the policy rule adopted by the central bank after the economy exits the trap. Employment remains depressed for a substantial period after an adverse shock because high unemployment increases the dispersion of household debt holdings, slowing the recovery of demand. I find that the initial household debt distribution significantly affects the economy's sensitivity to a demand shock, and study the role of central bank policy in mitigating the initial fall in employment and promoting faster recovery. Chapter 2 explores a novel channel through which financial shocks affect the real economy through the supply of liquidity. I consider a model in which firms require uncertain ongoing financing, and agency costs limit their ability to raise new funds. To secure future financing, firms hold assets to sell if needed, and purchase credit lines from financial intermediaries. I collectively refer to these instruments as liquidity. Financial intermediaries' ability to commit future funds depends on their capital. This creates a linkage between bank balance sheets and the aggregate supply of liquidity. Bank losses raise the liquidity premium and reduce investment. I analyze the optimal supply of public liquidity, and find that when private liquidity is scarce the government should issue bonds for their liquidity properties. I further find that the optimal supply of government debt is decreasing in bank capital. This suggests that in the wake of a financial crisis in which financial intermediaries suffer large losses, governments should increase debt issuance. Chapter 3 considers the distributive implications of financial regulation. It develops a model in which the financial sector benefits from financial risk-taking by earning greater expected returns. However, risk-taking also increases the incidence of large losses that lead to credit crunches and impose negative externalities on the real economy. A regulator has to trade off efficiency in the financial sector, which is aided by deregulation, against efficiency in the real economy, which is aided by tighter regulation and a more stable supply of credit.Item Essays on Firm Dynamics and Macroeconomics(2015) Decker, Ryan Allen; Haltiwanger, John C; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)I describe two studies in firm dynamics and macroeconomics. Chapter 1 reports on the large decline in entrepreneurial activity that preceded and accompanied the Great Recession and proposes a model relating this decline to the housing collapse. The collapse in entrepreneurial activity coincided with a historic decline in home values that preceded the onset of the broad recession by at least nine months. I describe a heterogeneous agent general equilibrium model with both housing and entrepreneurship. The model is characterized by financial frictions that affect both credit supply and credit demand. I consider the consequences of a “housing crisis” as compared to a “financial crisis.” The model produces a negative response of entrepreneurship to a housing crisis via a housing collateral channel; this mechanism can account for at least a quarter of the empirical decline in entrepreneurs’ share of activity. A financial crisis (which works through credit supply) has more nuanced effects, causing economic disruption that entices new low-productivity entrepreneurs into production. Chapter 2 describes a theory of endogenous firm-level risk over the business cycle based on endogenous firm market exposure. Firms that reach a larger number of markets diversify market-specific demand shocks at a cost. The model is driven only by total factor productivity shocks and captures the observed countercyclicality of firm-level risk. Consistent with the model, data from Compustat and the Longitudinal Business Database show that market reach is procyclical and that the countercyclicality of firm-level risk is driven mostly by those firms that adjust their market reach. This finding is explained by a negative elasticity between firm-level volatility and various measures of market exposure.