Three Essays on Macroeconomics, Oil Price Fluctuations, and Credit Risks in Banking Systems

This dissertation is a collection of theoretical and empirical essays on oil price fluctuations, macroeconomics, and credit risks in banking systems. The dissertation consists of three papers organized as chapters: i) Chapter 1 evaluates the optimal monetary policy response to the underlying causes of oil price fluctuations under a Dynamic Stochastic General Equilibrium (DSGE) framework for small open oil-importing economies, ii) Chapter 2 examines the empirical dynamic effects of underlying shocks of oil price fluctuations on monetary policy response and macroeconomic aggregates across oil-exporting and oil-importing open economies, and iii) Chapter 3, however, examines the effect of the recent oil price slumps on credit risks and banking instability across Gulf Cooperation Council (GCC) region. Chapter 3 further examines the macro-financial linkages between the real economy and GCC banking systems.;Chapter 1 constructs a DSGE model for small open oil-importing economies to evaluate the optimal monetary policy response to the underlying causes of oil price fluctuations and its transmission channels to these economies. This chapter incorporates oil supply disruption shock, oil demand shock driven by world economic activities, and oil speculative demand shock. The model incorporates oil and non-oil goods in consumption and final good production, oil storage with competitive oil-speculative firms, exogenously determined oil supply, and endogenously determined real oil price. The model explores whether the origin of oil price shocks requires a different optimal monetary policy response with a central bank committed to stabilizing output-gap and inflation. The results demonstrate that central banks in small open economies should indeed identify these underlying causes of oil price fluctuations and respond to the origin of the oil shock. Therefore, an oil price hike (or slump) caused by world economic activities induces a tightening (or expansionary) optimal monetary policy response. An oil price hike (or slump), however, caused by oil supply disruption and speculative oil demand shocks induces an expansionary (or tightening) optimal monetary policy response. The oil price hike induced by oil supply disruption and speculative oil demand shocks brings unwanted economic consequences to small open economies and therefore a monetary policy with stabilizing objectives will have to accommodate these shocks.;Chapter 2 further constructs a Structural VAR model that jointly captures the interactions between macroeconomic aggregates, monetary policy and the underlying causes of oil price fluctuations. The structural model of Chapter 2 follows Kilian (2009) in identifying the underlying the oil price shocks and Kim and Roubini (2000) in identifying the monetary policy in open economies. The results indicate that the oil supply disruption shock tends to have a diminished effect across oil-importing open economies. The oil demand shock driven by world economic activity, however, tends to stimulate domestic economic activities across oil exporting and oil importing open economies. Both world oil demand and oil-specific demand shocks place an inflationary pressure on domestic CPI across these economies. The results report asymmetric interest rate responses to different oil shocks within and across these open economies. In Mexico, Norway, Japan, Thailand, and Denmark; the interest rate falls in response to oil supply disruption shock. The interest rate rises in response to world oil demand shock across oil importing economies. The monetary policies, however, responded differently to oil-specific demand shock. The interest rate rises in oil-importing economies such as Japan, the U.K., Thailand, Denmark, and Sweden and falls in oil-exporting economies such as Canada, Norway, and Mexico.;Chapter 3 assesses the effect of the recent 2014-2015 oil price slumps on the financial stability in the Gulf Cooperation Council (GCC) region. The first objective of Chapter 3 is to assess the oil price shock transmission channels, along with other macroeconomic shocks, to GCC banks' balance sheets. This part of Chapter 3 implements a System Generalized Method of Moments (GMM) model of Blundell et al. (1998) and a Panel Fixed Effect Model to estimate the response of nonperforming loans (NPLs) to its macroeconomic determinants. The second objective of Chapter 3 is to assess any negative feedback effects between the GCC banking systems and the real economy. The second part of Chapter 3 implements a Panel VAR model to explore the macro-financial linkages between GCC banking systems and the real economy. The results indicate that oil price, non-oil GDP, interest rate, stock prices, and housing prices are major determinants of NPLs across GCC banks and therefore are major determinants of financial stability in the region. Credit risk shock tends to propagate disturbance to non-oil GDP, credit growth, and stock prices across GCC economies. A higher level of NPLs restricts banks' credit growth and can dampen economic growth in these economies. The results support the notion that disturbances in banking systems lead to unwanted economic consequences in the real sector. For policy makers with financial stability objectives, counter cyclical policies to fluctuations in international oil prices are needed to limit the GDP slowdown and smooth the potential spillover effects to banking systems. The GCC economies, however, accumulated large amount of oil stabilization buffers and have the fiscal space to limit any negative feedback to their financial sectors.