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Title: Essays on volatility in open economy macroeconomics
Author: Pericon Enriquez, Osvaldo
ISNI:       0000 0004 9355 6656
Awarding Body: Queen Mary University of London
Current Institution: Queen Mary, University of London
Date of Award: 2020
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This Ph.D. thesis is a collection of three self-contained chapters, written as part of a research agenda that analyses volatility in open economy macroeconomics. Emerging markets in general, and Latin American economies in particular, are major producers of commodities that range from oil to mining and agricultural goods. Countries such as Argentina, Chile and Peru are net exporters of commodities and the production of the latter takes a representative share of their gross domestic product. Thus, small open economies are highly dependent on commodity prices, and their behaviour holds a very close relationship with these countries' national income. Commodity prices are -however- of a very volatile nature, and this volatility can have an impact on the macroeconomic performance of commodity-producing countries. The terms of trade -the relative price of total exports in terms of total importsis a more general concept used in open economy macroeconomics that is closely related to commodity prices. Chapters 1 and 2 in this thesis study the effects of the volatility of terms of trade in a small open economy using a dynamic stochastic general equilibrium model within the real business cycles framework. In the first chapter, a focus is placed on the link between the terms of trade and total factor productivity, especially in economies that are not diversified and cluster their production around a particular commodity. The second chapter allows for an importable goods sector in addition to the exportable goods counterpart. Under this framework, the chapter emphasizes on the different dynamics that take place between producing sectors when shocks to the terms of trade occur. Chapter 3 takes a slightly different approach, as it analyses the effects of commodity price volatility on the performance of a number of large companies in Latin America, by using a range of financial indicators such as leverage, liquidity and capital accumulation. This chapter is a good empirical complement to chapters 1 and 2, as it moves from terms of trade to commodities, and from aggregate economies to firm-level data. A short summary of each of the chapters is shown below. Chapter 1: Total factor productivity, terms of trade and time-varying volatility in a small open economy, shows that changes in the volatility of total factor productivity in a small open economy have a negative effect on consumption, investment and output. I show this by solving a dynamic, stochastic general equilibrium model driven by a process of stochastic volatility. This process entails two types of shocks: a shock to productivity and a shock to the volatility around productivity. The model can replicate the stylized facts of small open economies and shows that productivity shocks are expansionary while volatility shocks are contractionary. When the economy is oriented towards the production of an exportable commodity, productivity shocks are closely related to the terms of trade, such that the economy is driven by shocks to the terms of trade and its volatility. Chapter 2: Terms of trade shocks, time-varying volatility and intersectoral dynamics in a small open economy, shows that shocks to the volatility of the terms of trade have a negative long-run effect on output, consumption and investment in a commodity-producing small open economy. I show this by solving a dynamic, stochastic general equilibrium model with two producing sectors driven by a stochastic volatility process on the terms of trade. The model can replicate the negative relationship between output and the terms of trade observed in the Chilean economy, as well as the Obstfeld-Razin-Svensson effects by which favorable terms of trade are associated with a deficit in the trade balance. Terms of trade shocks lead to a reallocation of resources towards the exportables sector, but volatility shocks have a negative long-run effect in the aggregate economy. Chapter 3: Commodity price volatility and investment dynamics: a firmlevel study, shows that commodity price volatility affects the investment decisions of firms across sectors in small open economies. Using an unbalanced panel data of more than 800 firms across nine different industries in Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela, I find that favorable prices in strategic sectors such as energy, agriculture and mining lead to an increase in firm investment. Likewise, energy and agriculture price volatility also contribute to investment positively. Other firm-related factors, such as consumer demand, the size of the firm, as well as its leverage and liquidity are significant contributors to investment behaviour.
Supervisor: Not available Sponsor: Not available
Qualification Name: Thesis (Ph.D.) Qualification Level: Doctoral
EThOS ID:  DOI: Not available