Essays In Macroeconomics And Financial Frictions
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Essays On Macroeconomics With Financial Frictions
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Author : Matthew Knowles
language : en
Publisher:
Release Date : 2017
Essays On Macroeconomics With Financial Frictions written by Matthew Knowles and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2017 with Banks and banking categories.
"This dissertation consists of three essays concerning the macroeconomic implications of financial market frictions that limit the ability of firms to obtain external finance. Each of the three chapters employs a theoretical macroeconomic model, combined with some empirical analysis, to study unanswered questions in the literature related to the importance of these financial market frictions for the wider economy. The three chapters consider, in turn, the effect of banking crises on investment, output and employment, the implications of financial market frictions for optimal capital taxation, and the effect of banking deregulation on the distribution of income. The first chapter studies the long slumps in output and employment following banking crises. In a panel of OECD and emerging economies, I find that recessions are associated with larger initial drops in investment and more persistent drops in output if they occur simultaneously with banking crises. Furthermore, the banking crises that are followed by more persistent output slumps are associated with particularly large initial drops in investment. I show that these patterns can arise in a model where a financial shock temporarily increases the costs of external finance for investing entrepreneurs. This leads to a drop in investment and a persistent slump in output. Critical to the model is the distinction between different types of capital with different depreciation rates. Intangible capital and equipment have high depreciation rates, leading these stocks to drop substantially when investment falls after a financial shock. If wages display some rigidity, this induces a slump in output and employment that persists for roughly a decade, through the contribution of the decline in equipment and intangibles to declining production and labor demand. I find that this mechanism can account for almost a third of the persistent drop in output and employment in the US Great Recession (2007-2014). In the model, TFP and government spending shocks lead to relatively smaller declines in investment and less persistent drops in output; so the model is also consistent with the more transitory output drops seen after non-financial recessions, where such shocks may have been more important. The second chapter, based on work co-written with Corina Boar, considers the implications of financial market frictions for optimal linear capital taxation, in a setting where the government is concerned with redistribution. By including financial frictions, we emphasize the effect of a new channel affecting the equity-efficiency trade-off of redistribution: taxes affect the allocative efficiency of capital and, ultimately, total factor productivity. We find that high tax rates can be optimal, provided that they are applied to wealth, rather than risky capital. Under plausible parameter values, we find that the optimal tax on risky capital is lower than that on wealth, and roughly in line with current U.S. levels. This suggests welfare gains from taxing wealth at a higher rate than risky capital. The third chapter, based on work co-written with Corina Boar and Yicheng Wang, studies the effect of banking deregulation in the US on the distribution of income, from both a theoretical and empirical perspective. We focus on the effect of the removal of interstate banking and branching restrictions over the 1970-1994 period. We present a theoretical model based on Greenwood and Jovanovic (1990) to illustrate the channels through which this deregulation may affect the income distribution. In the model, income inequality rises after banking deregulation for some values of the parameters--because deregulation decreases the cost of borrowing, which primarily benefits wealthy firm-owners. We empirically estimate the effect of interstate banking and branching deregulation on income inequality by exploiting variations in the timing of deregulation across states. We find that the removal of banking restrictions increased the Gini coefficient by 6 percent in the long run."--Pages ix-xi.
Essays In Macroeconomics With Financial Frictions
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Author : Juan M. Hernandez
language : en
Publisher:
Release Date : 2017
Essays In Macroeconomics With Financial Frictions written by Juan M. Hernandez and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2017 with categories.
How can governments design policies that alleviate the macroeconomic implications of financial frictions? This dissertation contributes to answer this question focusing on two aspects: international borrowing and crisis prevention at the country's level, and the impact of taxation and financial regulation on entrepreneurship at the agent's level. In the first chapter, debt crises arise from the incompleteness of sovereign debt markets: the government cannot credibly commit to repay or default in certain states of the world and this gives way to non-fundamental debt crises. In a strategic default environment, I show that international reserve holdings help to reduce the probability of these market-driven debt crises, advancing the theoretical literature that had struggled to explain why countries hold reserves while indebted. The results are consistent with previous empirical results that had shown countries with greater reserve holdings faced lower spreads in the sovereign debt markets, which is at odds with the previous theories. In the second chapter, a small open economy faces an aggregate borrowing constraint and the agents fail to internalize how their private borrowing decisions push the total debt towards the limit, making the current account adjustment more severe. We model the decentralized and planner's problem and find the optimal capital control policies, these are very effective to move the economy to the first-best scenario but also very hard to implement, given their state contingent nature. We then address the effectiveness of simpler policy rules, and find that they can bring welfare gains but had to be carefully designed. Finally, in the third chapter, the competition among investors for the most promising entrepreneurs, under adverse selection and limited liability, leads to an excessive entry into entrepreneurship activity and allocates resources to socially inefficient projects. We solve the optimal contracting problem and show that the inefficiency disappears if at least one of the next three is missing: competition in financial intermediation, adverse selection or limited liability. We also show that a small cost or fee per contract, like red-tape requirements, is enough to restore efficiency, making a case for financial regulation.
Essays In Macroeconomics And Financial Frictions
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Author : Christine N. Tewfik
language : en
Publisher:
Release Date : 2017
Essays In Macroeconomics And Financial Frictions written by Christine N. Tewfik and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2017 with categories.
My dissertation is comprised of three papers on the causes and consequences of the U.S. Great Recession. The emphasis is on the role that financial frictions play in magnifying financial shocks, as well as in informing the effectiveness of potential policies. Chapter 1, "Financial Frictions, Investment Delay and Asset Market Interventions," co-authored with Shouyong Shi, studies the role of investment delay in propagating different types of financial shocks, and how this role impacts the effectiveness of asset market interventions. The topic is motivated by the observation that, during the Great Recession, governments conducted large-scale asset market interventions. The aim was to increase the level of liquidity in the asset market and make it easier for firms to obtain financing. However, firms were observed to have delayed investment by hoarding liquid funds, part of which were obtained through the interventions. We construct a dynamic macro model to incorporate financial frictions and investment delay. Investment is undertaken by entrepreneurs who face liquidity frictions in the equity market and a collateral constraint in the debt market. After calibrating the model to the U.S. data, we quantitatively examine how aggregate activity is affected by two types of financial shocks: (i) a shock to equity liquidity, and (ii) a shock to entrepreneurs' borrowing capacity. We then analyze the effectiveness of government interventions in the asset market after such financial shocks. In particular, we compare the effects of government purchases of private equity and of private debt in the open market. In addition, we examine how these effects of government interventions depend on the option to delay investment. In Chapter 2, "Housing Liquidity and Unemployment: The Role of Firm Financial Frictions," I build upon the role that firms' ability to obtain funding plays in the severity of the Great Recession. I focus specifically on how the housing crisis reduced the ability of firms to obtain funding, and the consequences for unemployment. An important feature I focus on is the role of housing liquidity, or how easy it is to sell or buy a house. I analyze how an initial fall in housing market liquidity, linked to rising foreclosure costs for banks, affects labor market outcomes, which can have further feedback effects. I focus on the role that firm financial frictions play in these feedback effects. To this end, I construct a dynamic macro model that incorporates frictional housing and labor markets, as well as firm financial frictions. Mortgages are obtained from banks that incur foreclosure costs in the event of default. Foreclosure costs also affect the ease with which firms can borrow, and this influences their hiring decisions. I calibrate the model to U.S. data, and find that a rise in foreclosure costs that generates a 10% fall in the firm loan-to-output ratio results in a 3 percentage point rise in the unemployment rate. The rise in unemployment makes it more difficult for indebted owners to avoid defaulting on their mortgage. This rise in default, on the order of 20 percent, creates further slack in the housing market by both increasing the number of houses on the market and reducing the amount of buyers. Consequently, there are large drops in housing prices and in the size of mortgage loans. Notably, when firm financial frictions are absent, I observe a counter-factual fall in the unemployment rate, which mitigates the effects on the housing market, and even results in a fall in the mortgage default rate. The results highlight the importance of the impact of the housing market crisis on a firm's willingness to hire, and how firms' limited access to credit magnifies the initial housing shock. In Chapter 3, "Housing Market Distress and Unemployment: A Dynamic Analysis," I add to the contributions of my second paper, and extend the analysis to determine the dynamic effects of the housing crisis on unemployment. In Chapter 2, I focused on comparing stationary equilibria when there is a rise in the foreclosure costs associated with mortgage default. However, a full analysis must also take into account the dynamic effects of the shock. In order to do the dynamic analysis, I modify the model in my job market paper to satisfy the conditions of block recursivity. I do this by incorporating Hedlund's (2016) technique of introducing real estate agents in the housing market that match separately with buyers and sellers. Doing this makes the model's endogenous variables independent of the distribution of households and firms. Rather, the impact of the distribution is summarized by the shadow value of housing. This greatly improves the tractability of the model, and allows me to compute the dynamic response to a fall in a bank's ability to sell a foreclosed house, thus raising the costs of mortgage default. I find that the results are largely dependent on the size and persistence of the shock, as well as the level of firm financial frictions that are present. When firm financial frictions are high, as represented by the presence of an interest rate premium charged to firms, and the initial shock is large, the shock is transferred to firms via an endogenous rise in the cost of renting capital. Firms scale back on production and reduce employment. The rise in unemployment increases the debt burden for households with large mortgages. They can try and sell, but find it difficult to do so because they must sell at a high price to be able to pay off their debt. If they fail, they are forced to default, thus further raising the mortgage costs of banks, further reducing resources to firms, and propagating the initial shock. However, the extent of the propagation is limited; once the shock wears off, the economy recovers to its pre-crisis levels within two quarters. I discuss the reasons why, and what elements would be needed for greater persistence.
Essays On Macroeconomics With Financial Frictions
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Author : Wei Wang
language : en
Publisher:
Release Date : 2015
Essays On Macroeconomics With Financial Frictions written by Wei Wang and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2015 with Electronic dissertations categories.
This dissertation develops three independent yet related frameworks to identify economic mechanisms through which financial frictions affect the aggregate economy over the business cycle and along the path of economic development. There are three chapters in this dissertation. In each chapter, a theoretical model is constructed based on motivating empirical facts, followed by quantitative analyses disciplined and evaluated by data at both the macro- and micro-level. Chapter 1, Financial Frictions and Agricultural Productivity Differences, explores the role of financial frictions in accounting for agricultural employment share and labor productivity differences across provinces in China. A two-sector general equilibrium model with a subsistence consumption requirement and financial frictions is constructed. Limited credit decreases the use of intermediate inputs and increases the use of labor input. As a consequence, workers are trapped in the agricultural sector and agricultural labor productivity is low. Since agricultural employment consists of a large percentage of total employment, aggregate labor productivity is also low. Quantitatively, financial frictions alone explain more than 25% of the observed employment share and productivity differences. Financial frictions amplify the effect of TFP differences on agricultural productivity differences by 30%. Cross-country sectoral value-added per worker differences are large. Value-added per worker is much higher in non-agriculture than in agriculture in the typical country, and particularly so in poor countries. Even though these agricultural productivity gaps (APG) are large, poor countries devote most of their employment to agriculture. Based on a novel data set of value-added at the sectoral level that is comparable across provinces, I find the same patterns across provinces in China. In the second chapter, Credit Constraints, Human Capital and the Agricultural Productivity Gaps, I explore and quantify the role of financial frictions in accounting for these puzzling patterns. A two-sector heterogeneous-agent model with human capital investment, occupational choices and financial frictions is developed. Financial frictions depress human capital accumulation and distort occupational choices of rural households. Quantitatively, our model could account for a substantial portion of the observed cross-province differences in sectoral productivities and the APGs. The financial friction alone could account for 80% of the across-province differences in AGPs. It also explains 1/3 of the sectoral productivity differences and 1/5 of the differences in the agricultural employment share and the aggregate productivity across provinces. In Chapter 3, A Search-Theoretic Model of Capital Reallocation, I investigate how search frictions in the capital market affects capital reallocation across firms and the price of used capital over the business cycles. A tractable dynamic general equilibrium model is developed to account for procyclicality of capital reallocation. Firms are heterogeneous in their productivities and they trade used capital in a market which is subject to search frictions. After idiosyncratic productivity shocks are realized, firms are able to adjust their capital stock to a more favorable level before production. In the booms, the demand of used capital increases and the market tightness of used capital market is small. Hence, capital reallocation is larger and the price of used capital is higher. During the recessions, buyers demand less used capital and the market tightness is large. Consequently, capital reallocation is smaller and the price of used capital is lower. Quantitatively, the model could generate a correlation coefficient between capital reallocation and output that is consistent with the data.
Three Essays On Macroeconomics And Financial Frictions
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Author : Tiezheng Song
language : en
Publisher:
Release Date : 2019
Three Essays On Macroeconomics And Financial Frictions written by Tiezheng Song and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2019 with categories.
Essays In Macroeconomics With Financial Frictions
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Author : Eugenio Rojas
language : en
Publisher:
Release Date : 2019
Essays In Macroeconomics With Financial Frictions written by Eugenio Rojas and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2019 with categories.
This dissertation consists of two chapters on macroeconomics with financial frictions. The first chapter studies the role of firm heterogeneity in the transmission of financial shocks to the real economy. Evidence from the recent European debt crisis shows that firms responded differently to the severe credit tightening that occurred during this period, where smaller ones adjusted their balance sheets more aggressively and performed better in economies with a more skewed firm size distribution. A model of heterogeneous firms, that face financial frictions (defaultable debt and costly equity issuance), a financial intermediation sector, and a sovereign, is proposed to explain these facts. Financial frictions are key because they generate financing structures that depend on firm size, where small firms rely more on equity than debt, which is relatively more costly. Sufficiently large increases in public debt trigger a binding lending constraint for the intermediaries that cause a crowding out of private lending and leads smaller firms to adjust more than large firms. Quantitative results show that firm heterogeneity has aggregate effects and that the model, calibrated to match Spanish firm-level data, is consistent with the empirical facts during the crisis. The second chapter studies the positive and normative implications of "liability dollarization", the intermediation of capital inflows in units of tradables into domestic loans in units of aggregate consumption, on Sudden Stops models. Liability dollarization adds three important effects driven by real-exchange-rate fluctuations that alter standard models of Sudden Stops significantly: Changes on the debt repayment burden, on the price of new debt, and on a risk-taking incentive. The optimal policy under commitment is time-inconsistent, follows a complex non-linear structure, and shows that when domestic credit or capital inflows taxes are present, capital controls are not justified. Quantitatively, an optimized pair of constant taxes on domestic debt and capital inflows makes crises slightly less likely and yields a small welfare gain, but other pairs reduce welfare sharply. For high effective debt taxes, capital controls and domestic debt taxes are equivalent, and for low ones welfare is higher with higher taxes on domestic debt than on capital inflows.
Essays On Macroeconomics With Financial Frictions
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Author : Dominik Thaler
language : en
Publisher:
Release Date : 2016
Essays On Macroeconomics With Financial Frictions written by Dominik Thaler and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2016 with categories.
The first chapter of this thesis, joint with Angela Abbate analyses the importance of the risk-taking channel for monetary policy. To answer this question, we develop and estimate a quantitative monetary DSGE model where banks choose excessively risky investments, due to an agency problem which distorts banks’ incentives. As the real interest rate declines, these distortions become more important and excessive risk taking increases, lowering the efficiency of investment. We show that this novel transmission channel generates a new and quantitatively significant monetary policy trade-off between inflation and real interest rate stabilization: it is optimal for the central bank to tolerate greater inflation volatility in exchange for lower risk taking. The second chapter develops a quantitative model of sovereign default with endogenous default costs to propose a novel answer to the question why governments repay their debt. In the model domestic banks are exposed to sovereign debt. Hence sovereign default causes large losses for the banks, which translate into a financial crisis. The government trades these costs off against the advantage of not repaying international investors. Besides replicating business cycle moments, the model is able to generate not only output costs of a realistic magnitude, but also endogenously predicts that default is followed by a period during which no new foreign lending takes place. The duration of this period matches empirical estimates. The third chapter outlines a method to reduce the computationally necessary state space for solving dynamic models with global methods. The idea is to replace several state variables by a summary state variable. This is made possible by anticipating future choices that depend on one of the replaced variables. I explain how this method can be applied to a simple portfolio choice problem.
Essays On Money And Financial Frictions In Finance And Macroeconomics
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Author : Xuan Wang
language : en
Publisher:
Release Date : 2020
Essays On Money And Financial Frictions In Finance And Macroeconomics written by Xuan Wang and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2020 with categories.
Essays In Macroeconomics
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Author : Fernando A. Alvarez-Parra
language : en
Publisher:
Release Date : 2008
Essays In Macroeconomics written by Fernando A. Alvarez-Parra and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2008 with Business enterprises categories.
Essays On The Macroeconomic Implications Of Financial Frictions
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Author : Shuyun Li
language : en
Publisher:
Release Date : 2005
Essays On The Macroeconomic Implications Of Financial Frictions written by Shuyun Li and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2005 with categories.