Essays on economic fluctuations

Li, Xinyuan (2019) Essays on economic fluctuations. Doctoral thesis, University of London: London Business School.

Abstract

Chapter 1 studies the usefulness of one novel type of big data, Google search data, in nowcasting US jobless initial claims and US employment in a factor model. If the model has already included macroeconomic information, which is standard in the nowcasting literature, Google Trends data, as in Choi and Varian (2012), does not significantly improve the forecast. This challenges the usual view in the literature that Google search data help predicting macroeconomic variables. This paper also contributes to the literature with a detailed review of Google search data and suggestions for its future use. Chapter 2 proposes a new Bayesian perspective to determine the number of factors in a static factor model, which can be used in the macroeconomic or financial data analysis. The determination of the common factors and the factor loadings is framed as a model selection problem, and Bayesian inference is used. This method does not require strong assumptions as needed in the existing literature and endows flexibilities when choosing the hyperparameters. The algorithm performs well in the simulation exercise. Implementing this algorithm to the dataset in Stock and Watson (2005), I identify the number of factor that drives the macroeconomic data is one. Chapter 3 studies whether an identified US monetary policy shock affects the monetary stance of countries with a floating exchange rate regime and an open capital account, as well as the cross-border capital flows between these countries and the US. I find that an unexpected tightening of US monetary policy causes most currencies to depreciate against the dollar on impact. Short-term interest rates react heterogeneously: short term rates are not affected for some floaters but rise on impact for others. After an unexpected US tightening, gross flows contract while cross-border net flows behave heterogeneously. These findings advance our understanding of monetary transmission between countries with floating exchange arrangements.