Essays on Equity Prices, Monetary Policy and Economic Activities

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Title: Essays on Equity Prices, Monetary Policy and Economic Activities
Author: Al Nabulsi, Nasib
Contributor: Hanken School of Economics, Department of Finance and Economics, Finance
Belongs to series: Economics and society - 332 - Ekonomi och samhälle - 332
ISSN: 0424-7256 (printed)
2242-699X (PDF)
ISBN: 978-952-232-394-1 (printed)
978-952-232-395-8 PDF
Abstract: The financial crises during 2008 followed by quantitative easing environment implemented by central banks significantly affect macroeconomic stability. Since 2015, negative interest rate become a new phenomenon in the Euro area and in countries like Sweden and Denmark. These events revive the interest in how monetary policy channels influence economic output and financial markets. This dissertation consists of three essays that examine the correlation between monetary policy tools and economic activities—more specifically, interest rates, asset prices, consumption and economic growth in the context of the Nordic countries, with accounting for structural changes in the correlation between the variables. The first essay focuses on the predictive content of stock returns, short-term interest rates and the term spread by using non-linear regime switching models for forecasting GDP growth in Denmark, Finland, Norway and Sweden. The paper applies the threshold autoregressive (TAR) model-switching approach and regime-switching signals which combine the inversion of the yield curve and the recession as the signal to switch between economic states. The results suggest that the TAR model approach with an inversion–recession signal is preferable for predicting economic activity in all four of the Nordic countries. Among the Nordic countries, the predictive relationship between financial variables and economic activity is found to be the strongest in Finland and Sweden. The second essay uses time-varying parameter vector autoregression model and impose an exogenous monetary tightening shock on the Swedish equity market. The main findings are that monetary tightening shock results in a decrease in both components of the price—fundamental and mispricing. The nominal price is more responsive to the monetary policy shock after the year 2000. On average, the fundamental component of the asset price accounts for less than 40% of the expected response to a tighter monetary policy. These results are consistent with a “leaning against the wind” policy view. However, they contrast with the rational asset price bubble theory. The third essay examines the relative correlations between housing, stock-price movements and private consumption in Denmark, Finland and Sweden by means of time-varying parameter vector autoregression model to account for structural changes during economic restructuring periods and boom/bust cycles. The results suggest that the expected response of consumption to a shock in housing prices is higher in comparison to financial wealth. Furthermore, the results show the dynamic nature of the consumption response to wealth shocks, where the magnitude of the consumption response differs across the study period. There are shifts in how consumption responds to the housing price shock post-economic restructuring period in the 1980s. These shifts reflect the need to address the changing structure of the dependences between economic variables when examining the wealth effect on consumption in the Nordic context.
Date: 2019-12-03
Subject: asset prices
nonlinear modeling
economic growth
interest rate

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