Economics

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Browsing Economics by Author "Lam, Jean-Paul"

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    Commodity Prices, Stock Prices and Economic Activity in a Small Open Economy
    (University of Waterloo, 2018-05-10) McLeod, Shernette; Lam, Jean-Paul
    This thesis is comprised of three papers which jointly examine the role of commodity prices as well as other asset prices in influencing the evolution of economic activity in a small-open economy (SOE). Using Canada as the quintessential small-open economy, each chapter adopts a particular approach to investigating this dynamic relationship. It is hoped that the contribution made in this thesis to understanding the relationship will aid policy-makers as they attempt to address the associated policy questions which are often fraught with difficulties and uncertainty. In chapter 1 the use of a recursively identified Vector Auto-Regression (VAR) is employed to study the impact of commodity price shocks on Canada's macro-economy. While similar analysis has been carried out before, this has tended to focus solely on the impact of oil prices. Additionally, the analysis has tended to focus on aggregate output, while neglecting the specific sectoral impact. Given that each sectors' exposure to commodity price movements will be different, one would also expect varying sectoral responses to these shocks. Chapter 1 attempts to focus on this and thus offers a level of insight into the operation of the Canadian macro-economy which has not been extensively addressed in the literature. The results suggest that indeed there is divergent sectoral responses to commodity price shocks, using a broad measure of commodity prices. The commodity producing sectors of the economy respond favourably to an unexpected rise in commodity prices, whilst the manufacturing sector is negatively impacted by such movements. We also found evidence that policy-makers may attempt to contain any inflationary pressures emanating from rising commodity prices by raising interest rates. Chapter 2 delves even further into the dynamics of this relationship by employing a Dynamic Stochastic General Equilibrium (DSGE) model. In this chapter we extend the analysis undertaken in chapter 1, where we are again attempting to ascertain the sectoral responses to a commodity price shock. The use of this modelling framework however allows us to analyse that relationship in a manner which is internally consistent and also in-line with our beliefs about the behaviour of economic agents. Additionally, the DSGE model allows us to conduct counter-factual policy experiments which were not possible using the VAR framework. The results of the model are generally in-line with those found in chapter 1, as the commodity price shock has differing impacts on the various sectors of the economy. The results suggest that just examining the aggregate effects of commodity price shocks could overshadow important sectoral differences which are subsumed in these aggregate figures. Additionally, the counter factual policy exercises indicate that actions taken by the Central Bank during the Global Financial Crisis positively impacted Canada's economic performance during the crisis and the period immediately after. In the final chapter, co-authored with Jean-Paul Lam, we seek to quantify the interdependence between stock prices and monetary policy using an underidentified Structural VAR (SVAR) for Canada and the United States. We find that employing a recursive identification leads to counterfactual responses for the stock market following a monetary policy shock. In the underidentified VAR, the stock market and monetary policy are allowed to simultaneously react to each other's shock through a combination of short-run, long-run and sign restrictions. Unlike many studies in this literature, we impose a minimal number of restrictions on the short-run and long-run matrix, allowing the data to uncover the relationship between the variables in the SVAR. We find that an increase of 25 basis points (b.p.) in the policy rate of the central bank leads to a fall of about 1.75% in stock prices in Canada and to a fall of about 1.25% in stock prices in the U.S. This effect of monetary policy on stock prices is larger in Canada compared to the U.S. mainly because sectors that are interest rate sensitive, such as financials and energy account for a much larger share of the stock index in Canada compared to the U.S. Following a stock market shock, the short-term interest, industrial production, inflation and commodity prices rise both in Canada and in the U.S. A 1% increase in the stock market leads to an increase of about 27 b.p. in the overnight rate in Canada while it leads to an increase of about 10 b.p. in the Federal funds rate.
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    The Effect of Technological Innovations on Economic Activity
    (University of Waterloo, 2016-05-05) Oystrakh, Mykhaylo; Lam, Jean-Paul
    In this PHD dissertation, the nature of technological shocks and their effect on economic activity are examined. The first chapter is dedicated to the analysis of general purpose technologies (GPTs) and their identification in the patent data. I argue that the previous literature has been identifying sub-technologies of a given GPT rather than the technology itself. Moreover, I argue that the quantity of active GPTs identified using the old methodology is substantially greater than theoretically possible. The first chapter of my thesis presents an alternative approach to the identification of a general purpose technology than the one used in the previous literature and provides an example of such a technology identified in the patent data. This technology is the microcomputer. The chapter examines its evolution, diffusion, and the effect it has on other patented technologies. The findings are in line with the theoretical GPT literature. In the second chapter of my dissertation, I examine the effect of a positive technology shock on aggregate hours worked. Compared to the previous literature, the novelty of the approach proposed in the current study comes from two directions: the choice of variables and the technique used to identify the technological shock. A patent-based measure is the main measure used to approximate the unobserved aggregate technological process. The second important novelty of the study is the use of the sign restriction Vector Autoregression (VAR) shock identification technique that is believed to be more robust than the alternative identification techniques used in the literature. The sign restrictions are determined using a general equilibrium model with skilled and unskilled labour featuring skill-specific and general technology shocks. The analysis shows that aggregate hours increase following both kinds of technological shocks. The results obtained in the study are robust to the technology measure used. When a patent-based measure is replaced with a production function residual measure the effect of the shock still improves the aggregate hours. Moreover, the results are robust to the way aggregate hours themselves are specified. Finally the results are supported when more conventional long run restrictions are applied on the VAR. However, with the long run restrictions it does matter how the aggregate hours are specified the same way it mattered in the previous studies. In the third chapter, I continue the analysis of the effect of a technological improvement on the labour market. In this study, I attempt to address the general criticism of the VAR methodology about the fact that only a limited number of variables can be processed. This limitation requires a researcher to make a choice in favour of certain variables and to justify this choice. Moreover, no matter which variables are chosen for the final modeling form, some information would still be excluded from the study. I overcome this limitation by incorporating factor analysis techniques into the VAR framework. I introduce Factor-tofactor VAR (F-FAVAR) that is an extension of the FAVAR approach that has already been succesfully used in the past.The F-FAVAR methodology allows an inclusion of a latent factor "impulse variable" besides the latent factor "response variables". As a result a large number of macroeconomic variables is examined and there is no necessity to exclude any of the variables. Moreover, there is no necessity to make a choice in favour of a particular measure of technology. All the relevant technological measures can be included into the model. As a result it is possible to examine the reaction of various economic and business variables to a technological shock. The reaction of the key economic variables to a technology shock is in accordance with the theory. The reaction of various labour measures to the shock was also examined. The results of the third chapter mainly support the findings of the second chapter about the positive effect of a technology shock on aggregate hours. In order to check the robustness of the results, instead of the F-FAVAR methodology, a simple FAVAR methodology was also used. For that methodology it was necessary to select a particular measure of technology to be included into the VAR model as well as to impose restrictions on the VAR. Several different technology measures with two alternative sets of restrictions were used. The results of the robustness analysis mainly support the findings of the F-Favar methodology.
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    Monetary Policy Analysis and its Contemporary Challenges
    (University of Waterloo, 2024-01-26) Baker, John; Lam, Jean-Paul
    This thesis contains three essays on the empirical analysis of monetary policy. While the subjects are diverse, they all share the goal of providing for a thorough, data-driven analysis of critical policy developments related to communications from North American central banks. The first chapter examines the effectiveness of central bank communications as a policy tool. To evaluate this otherwise qualitatively-oriented policy channel, a new dictionary of central banking sentiment is developed using natural language processing. This dictionary aims to capture the relative prevalence of positive (contractionary) versus negative (expansionary) words used in discussions of the monetary policy landscape. It is then applied to a large sample of news articles, where sentiment scores are computed and adopted in two forms of empirical analysis. The first form of analysis utilizes these sentiment scores in a high-frequency event study, which indicate that positive communication surprises lead to increased interest rates across various horizons on the yield curve, along with an appreciation of the Canadian dollar relative to other major currencies. The sentiment measure is also employed in a lower-frequency analysis, where the average score across all articles is computed on a monthly basis. VAR estimates support the findings from the high-frequency event analysis and allow exploration of other outcomes available only at a monthly frequency. The analysis suggests limited direct evidence of links between communication shocks, prices, and real measures of economic activity, except for the real estate market. In the second chapter, we profile an essential case study that emerged during COVID-related monetary stimulus, where central banks sought to dismiss concerns about rising inflation as "transitory." This chapter focuses on the United States and develops a separate tailored dictionary that is used to quantify the degree of belief (or disbelief) in the transitory inflation signal. It analyzes news articles and tracks changes in sentiment-derived signal credibility over time, revealing that overall levels of credibility declined as positive inflation surprises persisted throughout 2021. This measure is then adopted within the framework of a daily VAR model, showing that the signal credibility measure declines significantly to positive inflation surprises and that market-based inflation expectations rise even at extended horizons in response to negative shocks from the credibility measure. The final chapter explores the potential intersection between economic inequality and monetary policy in Canada. In the first exercise, a macro panel exercise reveals a "U-shaped" effect on income sourced from labour, meaning that expansionary policy benefits the bottom and upper ends of the income distribution most significantly in percentage terms. A similar pattern is observed for non-labour income, which tend to favour the wealthiest Canadians, and particularly since the 2008-2009 Financial Crisis. Time series evidence highlights a growing connection between policy surprises and real asset prices, with a more modest impact on unemployment. Altogether, these essays address crucial issues related to monetary policy, emphasizing the importance of evidence-based analysis and objective quantitative research in evaluating the effectiveness and consequences of central bank communications and policies.