Essays in macro finance

Kind, Thilo (2021) Essays in macro finance. Doctoral thesis, University of London: London Business School.

Abstract

This thesis covers Fiscal and Monetary policy, Public Financing, and investment decisions from a theoretical and empirical Asset Pricing perspective. My first chapter highlights a novel risk-transmission channel in which the government's debt financing decision affects the path of inflation, even in a frictionless economy. The effects of maturity rebalancing on expected inflation in the fiscal theory directly depend on the conditional nominal term premium, giving rise to an optimal debt maturity policy that is state dependent. My research on monetary policy provides market-based evidence on threats to central bank independence. U.S. President Trump's tweets influence expectations about monetary policy leading to an erosion in the independence of the Federal Reserve due to political pressure. The high-frequency average effect on the expected fed funds rate is negative and statistically significant, with the magnitude growing by horizon. VAR evidence shows that the tweets impact actual monetary policy, the stock market, bond premia, and the macroeconomy. The chapter on Micro Uncertainty and Asset Prices shows that at low frequency, size and value premia exhibit strong positive co-movement, but are both negatively related to the equity premium. These patterns are explained in an investment-based asset pricing model featuring persistent micro and macro uncertainty. Micro uncertainty generates size and value premia waves, while macroeconomic uncertainty procures equity premium waves. The results highlights that the market index is a long-run hedge for value and size strategies. Lastly, my research on learning about ambiguous monetary policy highlights the effects of persistent revisions in policy rule expectations on macroeconomic variables and asset prices within a New Keynesian model with Calvo price setting. Extending the standard framework to generalized smooth recursive preferences allows me to separate the effects of risk aversion, elasticity of substitution, and ambiguity aversion when agents learn about regime switching monetary policy parameters.