THREE ESSAYS ON MACROECONOMICS, FINANCE, AND THE ENVIRONMENT

This dissertation examines the interplay on Macroeconomics, finance, and the environment, with a focus on compound risk transmission and sectoral heterogeneity.

The first chapter, Climate Shocks and Financial Crises during the Great Depression: A DSGE Analysis with Policy Lessons, investigates the compound crisis that struck China during the Great Depression, exacerbated by frequent and severe natural disasters. Using a newly constructed annual climate index based on the self-calibrated Palmer Drought Severity Index (scPDSI) and financial crises data from Reinhart and Rogoff (2009), the study identifies key periods of compounded disruptions. A DSGE model, tailored for China’s multi-sector economy under the silver standard, is employed to assess the roles of external financial shocks and internal climate shocks in macroeconomic fluctuations. The results reveal that climate shocks had a more dominant and lasting impact on agricultural output and GDP than the Great Depression itself, which primarily affected trade through declining exports and imports. Further analysis highlights how agricultural disruptions propagated through other sectors, intensifying economic instability. Counterfactual simulations suggest that while flexible interest rate adjustments could have mitigated short-term volatility, effective fiscal coordination would have been required to avoid resource misallocation and sustain agricultural investment. The findings highlight agriculture’s central role in transmitting compound shocks and emphasize the need for coordinated monetary and fiscal responses to manage multifaceted crises. China’s experience illustrates the importance of monetary autonomy, economic diversification, and institutional coordination. These historical insights are particularly relevant in today’s interconnected and climate-vulnerable global economy. They underscore the urgency of proactive policy planning to enhance economic resilience and support sustainable recovery in the face of escalating compound risks.

The second chapter, Asymmetric and Nonlinear Climate-Monetary Shocks: Revisiting China’s Price Revolution, revisits the "Price Revolution" in early modern Europe, often attributed to sustained inflation driven by massive silver inflows. In contrast, China (1736-1911) absorbed substantial foreign silver without experiencing a broad-based price surge. Paradoxically, despite significant silver outflows from the late 18th century onward, grain prices remained persistently high instead of declining. Using ARDL and NARDL models, the study examines the interplay between silver flows and climate variability, revealing that China’s price dynamics were shaped by multiple forces rather than a single silver-driven price revolution. The results show that short-run price responses to climate shocks are highly nonlinear and asymmetric, though this asymmetry gradually fades over time, leading to largely symmetric long-run adjustments. In the long run, drought severity significantly increases prices, indicating supply-side inflation, though this effect is only significant in the NARDL model. In contrast, floods and temperature variations show no significant long-term effects. These findings challenge quantity-theory-based interpretations and underscore the importance of nonlinear methods and multifaceted perspectives in both historical and contemporary economic analyses. The study provides insights into the operational mechanisms of the late Qing economy, illustrating how monetary, climatic, and social forces intersect to shape price dynamics.

The third chapter, The Nonlinear Impact of ESG on Stock Market Performance among U.S. Manufacturing and Banking Firms, examines the growing yet controversial role of ESG investing. While companies with high ESG scores may attract socially conscious investors, whether ESG ratings significantly impact stock market performance remains debated. This study investigates the relationship between ESG scores and financial performance, focusing on excess stock market returns (alpha) and risk-adjusted returns (Sharpe ratio). Using quantile regression analysis, the findings reveal a nonlinear relationship, characterized by a U-shaped pattern between ESG and alpha, and an inverted U-shaped link with the Sharpe ratio. Moreover, industry-specific differences emerge: in manufacturing, ESG investments require larger and longer-term commitments to generate financial benefits, whereas in banking, even small ESG investments can enhance financial performance. Additionally, the study finds that governance, environmental, and social components of ESG have differential effects on stock market returns in both industries, highlighting the importance of sector-specific ESG strategies.

Together, these chapters enhance the understanding of macro-financial and environmental linkages, demonstrating the significance of studying compound risk transmission channels, sectoral differences, and climate-monetary interactions in shaping economic stability and market outcomes —both historically and in contemporary contexts. Additionally, the findings on ESG investing highlight how nonlinear relationships and industry-specific dynamics influence financial performance, emphasizing the need for tailored ESG strategies in different sectors. By integrating insights from historical economic shocks, climate risks, and modern ESG considerations, this thesis provides a comprehensive perspective on how financial systems respond to environmental and policy challenges.