Studies in macroeconomic dynamics

Rendu, Christel (1999) Studies in macroeconomic dynamics. Doctoral thesis, University of London: London Business School.

Abstract

Studies in macroeconomic dynamics is composed of two parts. The first is entitled "The predictive power of the term spread: A theoretical assessment". It explores the leading indicator property of the term spread (LIPTS) for future economic activity. While the empirical evidence supporting the LEPTS is powerful, there are as yet no theoretical models justifying this finding. This study investigates whether dynamic equilibrium asset pricing models are able to provide a theoretical underpinning for the LIPTS. We study two models, an endowment and a production economy, each under two different assumptions about the infon-nation available to agents. We find that only a stochastic production economy is able to reproduce the LEPTS. Including advance knowledge further strengthens this result. The second study is entitled "European labour markets: Identifying true structural shocks". Its underlying motivation is the following: assuming that the single currency is a "shock", what impact will it have on the labour market and specifically, how will this impact differ across European countries? To analyse this issue, we look at how European labour markets react to shocks. We analyse the effect of three structural shocks on the French, German and Italian labour markets. For this purpose, we develop a new empirical framework. We work with a conditional VECM, where the cointegrating vectors are identified as long-run economic relationships and the shocks are recovered using testable structural restrictions. Both parts of the thesis focus on understanding macroeconomic dynamics. More generally, each is concerned with how variables in a macroeconomic system are connected to each other in a dynamic fashion. In order to highlight these dynamics,, both studies make extensive use of impulse response analysis. The two sections also seek to build a bridge between theory and reality: the first by trying to match an empirical fact with the theory, and the second by attempting to impose and test a theory on the data.