A new green bond augmented measure of money: theory and practice

Duan, Rongrui (2024). A new green bond augmented measure of money: theory and practice. University of Birmingham. Ph.D.

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Abstract

This thesis presents research within empirical monetary economics with a focus on the integration of monetary aggregates and their price dual with green bonds. Chapter I incorporates bonds, including green bonds, alongside traditional monetary assets in the construction of a broad Divisia monetary aggregate for the USA using the Törnqvist-Theil discrete time approximation for the continuous time Divisia Index. The user costs for calculating this index are risk-adjusted and forecasted for capital uncertain assets. The analysis reveals a significant and positive correlation between a broad Divisia monetary aggregate for the USA, including green bonds, and the detrended output gap. Consequently, the broad Divisia monetary aggregate augmented with green bonds can usefully serve as a monetary policy indicator. Green asset augmented Divisia monetary aggregates also have the potential to provide feedback to central banks on an evolving economy and aid in maintaining economic stability and addressing potential political pressures.
Chapter II contributes to the monetary vector autoregressive (VAR) literature as the first work to employ a newly green augmented Divisia price dual as a policy indicator for the USA. Three empirical results are obtained to support the use of green price dual as the policy indicator variable. First, policy shocks have significant effects on both output and price level. Second, user cost is closely correlated with the Federal Funds rate and could be an alternative for that rate as a policy indicator following the Taylor rule. The price dual is useful when the Federal Funds rate becomes stuck at its zero lower bound (ZLB) after 2008. Third, we develop a new VAR model that is not subject to the price puzzles.
Chapter III aims to examine the forecasting performance of newly constructed green-benchmarked Divisia monetary aggregates for the USA output gap. By using the green bonds as the benchmark asset, we successfully construct the green-return benchmarked and green-coupon benchmarked monetary aggregates with the rate of return on 20Y+ green bonds and the coupon rate of 20Y+ green bonds as the benchmark rate, respectively. We also construct the conventional Divisia monetary aggregate and the traditional simple sum monetary aggregate for comparison. We then employ the Markov regime switching vector autoregressive (MS-VAR) model to test the forecasting ability of these monetary aggregates in output gap. The green-benchmarked Divisia MS-VAR models are found to be superior in one-month, three-month, six-month and nine-month ahead forecasts.

Type of Work:

Thesis (Doctorates > Ph.D.)

Award Type:

Doctorates > Ph.D.

Supervisor(s):