Essays in macro-finance

Thesis

This thesis consists of four papers exploring different topics in macro-finance. Papers 1 and 2 investigate sovereign external debt risk in the face of U.S. monetary policy shocks. In Paper 1, I develop a two-country, two-period monetary general equilibrium model to analyse the benefits of equilibrium sovereign default on external debt. I show that, in emerging market economies (EMEs), debt restructuring in response to U.S. monetary policy shocks smooths consumption across time and states, stabilises exchange rates, reduces reliance on dollar-denominated debt, and, more importantly, increases domestic social welfare. Empirical evidence further supports these findings. Paper 2 extends the model from Paper 1 to an infinite-horizon, small open economy DSGE model to investigate how U.S. monetary policy shocks impact EMEs’ sovereign default incentives under different capital compositions. I show that EMEs’ incentives to default on external debt depend on their reliance on imported capital goods and on their overall capital share. Specifically, economies with a high dependence on imported capital goods and a high capital share experience greater exchange-rate externalities because of the inelastic demand for foreign capital. As a result, these externalities increase the potential costs of default, thereby reducing incentives to default on external debt. Paper 3 shifts focus to another important topic in macro-finance: how climate change affects the transmission of monetary policy, with a particular focus on price stability. I demonstrate that central banks face a trade-off between inflation stabilisation and climate risks. I show that green monetary policy can address climate change issues and increase social welfare, particularly when carbon taxation is suboptimal, although it may come at the cost of inflation. Paper 4 develops knowledge-graph-based measures using a fine-tuned large language model. The factor testing results indicate that these thematic measures capture time-varying macroeconomic trends, exhibit unconditional forecasting power for economic activity, and serve as unconditional risk factors in asset pricing models.

Authors: Tan, Y

• DOI: 10.5287/ora-rj8yav26x
• Type of award: DPhil
• Level of award: Doctoral
• Awarding institution: University of Oxford
• Language: English
• Keywords: sovereign debt restructuring; dollar-denominated debt; exchange rate pricing; Mussa puzzle; original sin
• Subjects: Macro-Finance; Finance