Monetary Policy Rules, Total Factor Productivity Growth and Uncertainty:An Empirical Assessment

This dissertation explores how uncertainty a�ffects diff�erent facets of an economy through three empirical essays. First, we presents an analytical framework to examine the policy
reaction function of a central bank in an open economy context while allowing for asymmetric
preferences. This implies that the policy makers can weigh negative and positive
deviations of target variables (inflation and output gap) from their corresponding targets
di�fferently. We use an open economy New-Keynesian forward looking model where aggregate
demand and supply depend on real exchange rate. Using quarterly data ranging
from 1979q1-2007q4 for Canada, Japan, the UK and the US, the empirical evaluation is
drawn through generalized methods of moments. The results strongly favor the presence
of asymmetries in the response of monetary policy towards both inflation rate and output
gap for all sample countries. The estimates show that central banks follow an active monetary
policy. Also, there is evidence that changes in foreign interest rate and exchange
rate �significantly aff�ects the domestic monetary policy formation.
Second, we examine the role of various sources of uncertainty on total factor productivity
growth. Specifi�cally, this essay estimates the role of of uncertainty emanating from global,
country, and industry level on TFP growth in manufacturing industries of sixteen emerging
economies. For this purpose, we use annual data covering the period from 1971-2008.
Our fi�ndings suggest a signifi�cant impact of each source of uncertainty on TFP growth.
Particularly, we observe that industry and country specifi�c uncertainty have a positive
impact on TFP growth of manufacturing industries. However, global uncertainty has statistically
signifi�cant and negative impact on TFP growth. We also provide evidence that
the impact of industry speci�fic uncertainty strengthens as the size of industry increases
whereas the reverse holds for both country specifi�c and global uncertainty. In addition,
we observe that the positive impact of both industry and country speci�fic uncertainty gets
stronger at higher levels of factor intensity.
Third, we examine the role of of uncertainty of technology diff�usion in TFP convergence of
manufacturing industries of frontier and non-frontier countries. For this purpose, we use
annual data covering the time period from 1981-2008, eighteen manufacturing industries of fi�ve emerging economies. We employ superlative index number approach to compute the
TFP level and growth in manufacturing industries of these countries. Our �findings suggest
a signi�ficant evidence of TFP convergence in manufacturing industries of non-frontier and
frontier countries. Moreover, technology diff�usion not only pertains a positive impact on
TFP growth of manufacturing industries of non-frontier countries but also facilitates the
process of TFP convergence. More importantly, we report a signi�ficant negative impact
of uncertainty of technology diff�usion on the TFP growth.