University of Groningen Essays on the U.S. financial cycle: construction, real effects and cross-border spill-overs Rozite, Kristiana

University of Groningen

Essays on the U.S. financial cycle: construction, real effects and cross-border spill-overs Rozite, Kristiana

DOI:

10.33612/diss.93764840

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Publication date: 2019

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Rozite, K. (2019). Essays on the U.S. financial cycle: construction, real effects and cross-border spill-overs. University of Groningen, SOM research school. https://doi.org/10.33612/diss.93764840

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Essays on the U.S. financial cycle: construction,

real effects and cross-border spill-overs

Publisher: University of Groningen, Groningen, The Netherlands Printed by: Ipskamp Printing

ISBN: 978-94-034-1877-3 (Paperback) ISBN: 978-94-034-1876-6 (eBook)

c 2019 Kristi¯ana Roz¯ıte

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system of any nature, or transmitted in any form or by any means, electronic, mechanical, now known or hereafter invented, including photocopying or recording, without prior written permission of the author.

Essays on the U.S. financial cycle:

construction, real effects and

cross-border spill-overs

Phd thesis

to obtain the degree of PhD at the University of Groningen

on the authority of the

Rector Magnificus prof. C. Wijmenga and in accordance with

the decision by the College of Deans. This thesis will be defended in public on

Monday 26 August 2019 at 12.45 hours

by

Kristi

ā

na Roz

ī

te

Supervisor

Assessment Committee

My humble acknowledgments to my family, friends and the teachers I met. I would like to thank my supervisor Prof. Dirk Bezemer for the research freedom to select topics and methods to present my take on the U.S. financial cycle. I thank my co-author Jan Jacobs for believing in my research skills and contributing to the broader research exposure. I am grateful to the reading committee, Prof. S.J.

Koopman, Prof. R.C. Inklaar, and Prof. H. Bo for the time they invested to read this thesis and suggested improvements.

You truly know the nature of things when they are in constant change. The duality in nature such as life and death, good and evil is the engine of this motion. The blissful steady-state would stop the process of knowing yourself.

Contents

1 Introduction 1

1.1 Background and motivation . . . 1

1.2 History of the US financial sector regulation . . . 5

1.3 Outline of the thesis . . . 8

2 Towards a financial cycle for the U.S., 1973–2014 10 2.1 Introduction . . . 10

2.2 Literature review . . . 12

2.2.1 Real-financial linkages and a financial cycle . . . 12

2.2.2 Formalizing financial-real sector linkages . . . 14

2.3 Method . . . 15

2.4 Data . . . 18

2.5 Results . . . 19

2.5.1 Common movements . . . 19

2.5.2 Household and Corporate Sentiment in the Financial Cycle . . 22

2.6 Comparison to other indexes . . . 26

2.6.1 Financial conditions indexes . . . 27

2.6.2 Economic conditions indexes . . . 28

2.6.3 Comparison . . . 28

2.7 Conclusion . . . 31

Appendix A 33 3 Manufacturing industries investment and market sentiment 39 3.1 Introduction . . . 39

3.2 Empirical strategy . . . 41

3.3 Data and variables . . . 44

3.4 Results . . . 48

3.5 Conclusion . . . 56 i

ii CONTENTS

Appendix B 57

4 Financial and real integration between Mexico and the United States 60

4.1 Introduction . . . 60 4.2 Data . . . 63 4.3 Stylized Facts . . . 67 4.4 Model . . . 70 4.5 Estimation strategy . . . 72 4.6 Results . . . 73 4.6.1 Univariate analysis . . . 73 4.6.2 Multivariate analysis . . . 76

4.6.3 Exploring the role of NAFTA . . . 81

4.7 Conclusion . . . 84 Appendix C 86 5 Summary 89 5.1 Main findings . . . 89 5.2 Policy implications . . . 91 5.3 Future research . . . 92 Appendix D 94 References 97

List of Tables

2.1 Average dynamic correlations and correlations at long-wave periodic

components, calculated in reference to periodic components of SYCt. . 21

2.2 Loadings of the first two principal components. . . 25

2.3 Correlations between financial condition and real condition indexes . 30 2.4 Estimated turning points for the indexes in reference to the NBER business cycle turning points and comparison with the GDP growth rate cycle. . . 31

A.1.1Description of the dataset . . . 34

A.1.2Summary statistics . . . 36

A.2.1Variance explained by the principal components . . . 38

3.2.1 Parameter restrictions for different specifications and different types of control variables. . . 42

3.3.1 The external dependence estimates for the U.S. manufacturing indus-tries. . . 46

3.4.1 Effects of investor sentiment on investment with industry fixed effects. 51 3.4.2 Effects of investor sentiment on investment with industry fixed effects and profit–sentiment interaction. . . 52

3.4.3 Effects of investor sentiment on investment with industry and time fixed effects. . . 53

3.4.4 Effects of investor sentiment on investment with industry and time fixed effects, and profit–sentiment interaction. . . 54

3.4.5 Effects of investor instrumented sentiment on investment and industry and time fixed effects . . . 55

B.1.1 Manufacturing industries naming correspondence between datasets. . 58

B.1.2 Summary statistics . . . 59 iii

iv LIST OF TABLES

4.3.1 Kendall rank correlations for Mexican and U.S. economic activity indi-cators. . . 68 4.3.2 The turning points of U.S. and Mexican indicators. . . 69 4.3.3 Factor analyses of indicator co-movements. . . 70 4.6.1 Business and financial cycle components found in univariate model

estimations. . . 75 4.6.2 Factor loadings describing the United States’ and Mexico’s financial

and real integration. . . 77 4.6.3 Decomposition of variance for the Mexican indicators (%). . . 81 4.6.4 Global and Mexican business cycle subsample effects on Mexican

indi-cators. . . 82 4.6.5 Decomposition of variance (%) for the Mexican indicators over the

subsamples. . . 83 C.3.1Dickey Fuller unit root test . . . 88 D.0.1A brief literature review . . . 94

List of Figures

1.1 Financial accelerator . . . 2

2.1 Standardized financial indicators . . . 20

2.2 Phase shift and sign adjusted data of the U.S. financial indicators. . . . 23

2.3 Scree plot of eigenvalues from principal component analysis . . . 24

2.4 The U.S. corporate sentiment and household sentiment . . . 25

2.5 Standardized financial and economic conditions indexes. . . 29

A.1.1Dynamic correlations . . . 37

3.3.1 U.S. investor sentiment and the spread between Eurodollar three-month deposit rates and LIBOR three-month rates. . . 48

4.2.1 Standardized Mexican and U.S. macroeconomic and financial indicators 65 4.6.1 U.S. and Mexican financial and business cycles. . . 80