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University of Glasgow

1. Yadav, Jayant. Flight to safety in macroeconomics : role of cyclical risk aversion.

Degree: PhD, 2021, University of Glasgow

The thesis contains three main chapters that investigate the Flight to Safety phenomenon and its impact on the macroeconomy from an empirical and theoretical perspective. In doing so, it advocates for a more significant role of investors’ time-varying, state-varying and cyclical risk aversion in macroeconomic models and policy analysis. The first chapter establishes that Flight to Safety, a sudden and short term asset market phenomenon is worth the attention, as the identified Flight to Safety shocks have long-run adverse impact on US business cycles. The investigation then takes the direction to theoretically formalize the role of Flight to Safety in micro-founded DSGE models. The second chapter establishes that similar to the asymmetric impact of flight of capital (to safety or risk) on asset markets, the optimal policy for investors with cyclical risk-aversion should also be asymmetric in costly recessions. The third chapter brings the analysis back to Flight to Safety by demonstrating it as an optimal response in costly recessions when risk-averse investors have a low risk-bearing capacity. The thesis makes multiple contributions of which the three major ones are as follows. Firstly, its central conviction is to identify the role of Flight to Safety as the critical driver of business cycle fluctuations. By means of structural VAR model, it shows that Flight to Safety shocks predate any regress in total factor productivity by several years, and account for more than 50% of fluctuations in macroeconomic variables at business cycle frequency. The finding that FTS can generate a long and sustained decline in investment-related macroeconomic variables asks several questions from the established tenets of business cycle dynamics. It proposes an alternative view that shocks to investors’ risk aversion lead to booms and busts in business cycles. Secondly, the thesis shows that precautionary savings behaviour matters, and it changes non-linearly in the amount of information and control agents have over their future consumption. Therefore, optimal discretionary policy needs to actively and asymmetrically manage this precautionary behaviour. A policymaker without an ability to observe the output gap can also replicate the optimal strategy by restoring the equity premium to its steady-state level. Lastly, the thesis demonstrates that households near the upper or lower ends of their risk-bearing capacity demonstrate sudden changes in their risk allocation that echo with the ‘risk on’ and ‘risk off’ phenomena. It also challenges the standing approach in literature to consider Flight to Safety phenomenon only as an aberrant reaction to some form of market externalities, constraints or uncertainty and thereby overlooking it for monetary policy.

Subjects/Keywords: HB Economic Theory

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APA · Chicago · MLA · Vancouver · CSE | Export to Zotero / EndNote / Reference Manager

APA (6th Edition):

Yadav, J. (2021). Flight to safety in macroeconomics : role of cyclical risk aversion. (Doctoral Dissertation). University of Glasgow. Retrieved from http://theses.gla.ac.uk/81958/ ; https://ethos.bl.uk/OrderDetails.do?uin=uk.bl.ethos.822091

Chicago Manual of Style (16th Edition):

Yadav, Jayant. “Flight to safety in macroeconomics : role of cyclical risk aversion.” 2021. Doctoral Dissertation, University of Glasgow. Accessed March 01, 2021. http://theses.gla.ac.uk/81958/ ; https://ethos.bl.uk/OrderDetails.do?uin=uk.bl.ethos.822091.

MLA Handbook (7th Edition):

Yadav, Jayant. “Flight to safety in macroeconomics : role of cyclical risk aversion.” 2021. Web. 01 Mar 2021.

Vancouver:

Yadav J. Flight to safety in macroeconomics : role of cyclical risk aversion. [Internet] [Doctoral dissertation]. University of Glasgow; 2021. [cited 2021 Mar 01]. Available from: http://theses.gla.ac.uk/81958/ ; https://ethos.bl.uk/OrderDetails.do?uin=uk.bl.ethos.822091.

Council of Science Editors:

Yadav J. Flight to safety in macroeconomics : role of cyclical risk aversion. [Doctoral Dissertation]. University of Glasgow; 2021. Available from: http://theses.gla.ac.uk/81958/ ; https://ethos.bl.uk/OrderDetails.do?uin=uk.bl.ethos.822091

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