Three Essays in Macroeconomics with a Focus on Confidence, Investment and the Business Cycle

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Upadhayaya, Santosh




This thesis includes three essays on empirical macroeconomics. The first chapter studies how informative business confidence is for investment growth, using US business confidence survey data for 1955Q1--2016Q4. Our main findings are: (i) business confidence has predictive ability for investment growth; (ii) remarkably, business confidence has superior forecasting power, relative to conventional predictors, for investment downturns over 1--3 quarter forecast horizons and for the sign of investment growth over a 2--quarter forecast horizon; and (iii) exogenous shifts in business confidence reflect short-lived non-fundamental factors, consistent with the `animal spirits' view of investment. Our findings have implications for improving investment forecasts, developing new business cycle models, and studying the role of social and psychological factors determining investment growth.

The second chapter explores the hypothesis that consumer confidence drives household investment. We use a survey-based consumer confidence measure in structural VAR analysis to identify a confidence shock. Household investment increases and follows a persistent hump-shaped response after a positive confidence shock. The responses of total hours-worked and output are also highly persistent. Confidence shocks account for a substantial share of variation in household investment, total hours-worked and output. We show that household investment plays a quantitatively important role in the transmission of confidence shocks in the economy. Our findings suggest that demand side forces originating in consumer's social and psychological factors may be a fruitful direction for studying household investment dynamics and their relationship with the business cycle.

The final chapter studies the effect of profit uncertainty on US manufacturing firms' inventory investment, using an unbalanced panel data for 1981--2017. The main findings are: (i) US firms hold larger stocks of inventories with higher uncertainty; (ii) each component (i.e. raw materials, work-in-progress and finished goods) of inventory investment is positively driven by higher uncertainty; (iii) small firms do not increase inventory investment with higher uncertainty; and (iv) remarkably, high leverage firms increase inventory investment even in the tightened financial constraints. The findings suggest that the firms' characteristics is an important mechanism through which uncertainty affects inventory investment over the business cycle.


Business cycles




Carleton University

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Theses and Dissertations

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