Essays On Information And Financial Frictions In Macroeconomics
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Essays On Information And Financial Frictions In Macroeconomics
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Author : Abolfazl Rezghi
language : en
Publisher:
Release Date : 2023
Essays On Information And Financial Frictions In Macroeconomics written by Abolfazl Rezghi and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2023 with categories.
This dissertation examines how information and financial frictions impact firms' investment decisions and shape the effectiveness of monetary policy. The first chapter studies the response of high and low credit quality firms to expansionary monetary shocks. According to the findings, high credit quality firms respond to an expansionary shock by increasing their investment, inventory, and sales, whereas low credit quality firms experience a decrease in these variables. Moreover, their financing behavior differs, with high credit quality firms raising funds through equity while low credit quality firms are unable to issue equity or debt. To provide a theoretical explanation for these findings, a simple model is constructed with two types of firms: financially constrained firms and unconstrained firms. Financially constrained firms face a trade-off in allocating their limited funds between wage payments and investment, while unconstrained firms have greater financial flexibility. As a result of an expansionary shock, an increase in wages affects constrained firms disproportionately, leading them to cut their investment to cover the additional labor costs. Furthermore, constrained firms, due to their limited collateral, have to reduce their debt, which aligns with the empirical observations. The second chapter examines the interaction between information and financial frictions and its implications for the investment channel of monetary policy. In a model with inattentive firms facing financial frictions, constrained firms are more attentive to monetary policy as they attempt to avoid financial costs, creating a new channel for financial frictions to affect price rigidity. Since the level of price rigidity is one of the determinants of the outcome of the monetary policy, the model suggests that the investment channel of monetary policy hinges on the interaction between financial frictions and rational inattention. The research provides empirical evidence that supports the predictions of the model. Firstly, the study uses firms' expectation surveys and, taking size as a proxy for financial constraint, finds that smaller firms have more precise nowcasts and forecasts of aggregate variables. Additionally, these firms are more willing to pay for professional forecasts. Secondly, the research employs firms' balance sheet data and a proxy for aggregate attentiveness to demonstrate that higher information rigidity leads to a sluggish and dampened aggregate investment response to monetary shocks, as predicted by the model. The third chapter finds that a contractionary monetary shock would increase the number of defaults and the aggregate liability of defaulted firms in the economy. Using a DSGE model with financial intermediaries, I show that a higher rate of default negatively impacts the balance sheets of banks and leads to a decrease in the supply of credit and a rise in the interest rate of loans. This further increases the cost of production, forcing more firms to file for bankruptcy. The study demonstrates that monetary policy can effectively dampen this amplification mechanism by considering the default rate in the policy rule, thereby ensuring a more stable economic environment
Essays On Informational Frictions In Macroeconomics And Finance
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Author : Jennifer La'O
language : en
Publisher:
Release Date : 2010
Essays On Informational Frictions In Macroeconomics And Finance written by Jennifer La'O and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2010 with categories.
This dissertation consists of four chapters analyzing the effects of heterogeneous and asymmetric information in macroeconomic and financial settings, with an emphasis on short-run fluctuations. Within these chapters, I study the implications these informational frictions may have for the behavior of firms and financial institutions over the business cycle and during crises episodes. The first chapter examines how collateral constraints on firm-level investment introduce a powerful two-way feedback between the financial market and the real economy. On one hand, real economic activity forms the basis for asset dividends. On the other hand, asset prices affect collateral value, which in turn determines the ability of firms to invest. In this chapter I show how this two-way feedback can generate significant expectations-driven fluctuations in asset prices and macroeconomic outcomes when information is dispersed. In particular, I study the implications of this two-way feedback within a micro-founded business-cycle economy in which agents are imperfectly, and heterogeneously, informed about the underlying economic fundamentals. I then show how tighter collateral constraints mitigate the impact of productivity shocks on equilibrium output and asset prices, but amplify the impact of "noise", by which I mean common errors in expectations. Noise can thus be an important source of asset-price volatility and business-cycle fluctuations when collateral constraints are tight. The second chapter is based on joint work with George-Marios Angeletos. In this chapter we investigate a real-business-cycle economy that features dispersed information about underlying aggregate productivity shocks, taste shocks, and-potentially-shocks to monopoly power. We show how the dispersion of information can (i) contribute to significant inertia in the response of macroeconomic outcomes to such shocks; (ii) induce a negative short-run response of employment to productivity shocks; (iii) imply that productivity shocks explain only a small fraction of high-frequency fluctuations; (iv) contribute to significant noise in the business cycle; (v) formalize a certain type of demand shocks within an RBC economy; and (vi) generate cyclical variation in observed Solow residuals and labor wedges. Importantly, none of these properties requires significant uncertainty about the underlying fundamentals: they rest on the heterogeneity of information and the strength of trade linkages in the economy, not the level of uncertainty. Finally, none of these properties are symptoms of inefficiency: apart from undoing monopoly distortions or providing the agents with more information, no policy intervention can improve upon the equilibrium allocations. The third chapter is also based on joint work with George-Marios Angeletos. This chapter investigates how incomplete information affects the response of prices to nominal shocks. Our baseline model is a variant of the Calvo model in which firms observe the underlying nominal shocks with noise. In this model, the response of prices is pinned down by three parameters: the precision of available information about the nominal shock; the frequency of price adjustment; and the degree of strategic complementarity in pricing decisions. This result synthesizes the broader lessons of the pertinent literature. However, this synthesis provides only a partial view of the role of incomplete information: once one allows for more general information structures than those used in previous work, one cannot quantify the degree of price inertia without additional information about the dynamics of higher-order beliefs, or of the agents' forecasts of inflation. We highlight this with three extensions of our baseline model, all of which break the tight connection between the precision of information and higher-order beliefs featured in previous work. Finally, the fourth chapter studies how predatory trading affects the ability of banks and large trading institutions to raise capital in times of temporary financial distress in an environment in which traders are asymmetrically informed about each others' balance sheets. Predatory trading is a strategy in which a trader can profit by trading against another trader's position, driving an otherwise solvent but distressed trader into insolvency. The predator, however, must be sufficiently informed of the distressed trader's balance sheet in order to exploit this position. I find that when a distressed trader is more informed than other traders about his own balances, searching for extra capital from lenders can become a signal of financial need, thereby opening the door for predatory trading and possible insolvency. Thus, a trader who would otherwise seek to recapitalize is reluctant to search for extra capital in the presence of potential predators. Predatory trading may therefore make it exceedingly difficult for banks and financial institutions to raise credit in times of temporary financial distress.
Three Essays In Financial Frictions And International Macroeconomics
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Author : Alexandre Kopoin
language : en
Publisher:
Release Date : 2014
Three Essays In Financial Frictions And International Macroeconomics written by Alexandre Kopoin and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2014 with categories.
This dissertation investigates the role of financial frictions stemming from asymmetric information in financial markets on the transmission of shocks, and the fluctuations in economic activity. Chapter 1 uses the targeted factor modeling to assess the contribution of national and international data to the task of forecasting provincial GDPs in Canada. Results indicate using national and especially US-based series can significantly improve the forecasting ability of targeted factor models. This effect is present and significant at shorter-term horizons but fades away for longerterm horizons. These results suggest that shocks originating at the national and international levels are transmitted to Canadian regions and thus reflected in the regional time series fairly rapidly. While Chapter 1 uses a non-structural, econometric model to tackle the issue of transmission of international shocks, the last two Chapters develop structural models, Dynamic Stochastic General Equilibrium (DSGE) models to assess spillover effects of the transmission of national and international shocks. Chapter 2 presents an international DSGE framework with credit market frictions to assess issues regarding the propagation of national and international shocks. The theoretical framework includes the financial accelerator, the bank capital and exchange rate channels. Results suggest that the exchange rate channel, which has long been ignored, plays an important role in the propagation of shocks. Furthermore, with these three channels present, domestic and foreign shocks have an important quantitative role in explaining domestic aggregates. In addition, results suggest that economies whose banks remain well-capitalized when affected by adverse shock experience less severe downturns. These results highlight the importance of bank capital in an international framework and can be used to inform the worldwide debate over banking regulation. In Chapter 3, I develop a two-country DSGE model in which banks grant loans to domestic as well as to foreign firms to study effects of these cross-border banking activities in the transmission of national and international shocks. Results suggests that cross-border banking activities amplify the transmission of productivity and monetary policy shocks. However, the impact on consumption is limited, because of the cross-border saving possibility between the countries. Moreover, results suggests that under cross-border banking, bilateral correlations become greater than in the absence of these activities. Overall, results demonstrate sizable spillover effects of cross-border banking in the propagation of shocks and suggest that cross-border banking is an important source of the synchronization of business cycles.
Essays On Financial Frictions And Macroeconomics
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Author : Sewon Hur
language : en
Publisher:
Release Date : 2012
Essays On Financial Frictions And Macroeconomics written by Sewon Hur and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2012 with categories.
Essays On Information Frictions And The Macroeconomy
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Author : Andras Komaromi
language : en
Publisher:
Release Date : 2015
Essays On Information Frictions And The Macroeconomy written by Andras Komaromi and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2015 with categories.
This dissertation is a compilation of three essays on the role of information frictions in macroeconomics. The first essay contributes to the literature on the impact of uncertainty on the business cycle. The cross-sectional dispersion of firm-level outcomes, such as sales growth or stock returns, is markedly countercyclical. Recent papers have framed this fact as evidence that exogenous "uncertainty shocks" are important drivers of business cycles. This paper provides empirical evidence that the co-movement of various dispersion measures with the business cycle is better understood as the economy's endogenous response to traditional first moment shocks - dispersion is the effect, not the cause. It then develops a theoretical model that links the cross-sectional dispersion of micro-level outcomes to the aggregate state of the economy. The mechanism is based on time-varying rational inattention. In bad times, firms pay more attention to idiosyncratic shocks hitting their business environment. More precise micro- level information about the underlying heterogeneity leads to higher dispersion in realized outcomes. In line with the empirical findings, the model generates countercyclical dispersion without relying on exogenous second moment (uncertainty) shocks. The second essay uses survey expectations to assess the microfoundations of an important class of macroeconomic models. Many theoretical macro models try to explain the pervasive nominal and real stickiness in the data by assuming rational decision-making under imperfect information. The behavior of consensus (average) forecasts is consistent with the predictions of these models, which can be seen as supportive empirical evidence for the models' microfoundations (Coibion and Gorodnichenko, 2012). This paper demonstrates, however, that the individual-level data underlying the consensus forecasts are at odds with this interpretation. In particular, I document that individual expectations in the Survey of Professional Forecasters do not pass a very weak test of rational expectations: current forecast revisions are strong predictors of subsequent forecast errors. Information frictions alone cannot explain this pattern. I go on to propose a simple modification of the noisy information framework that allows for a particular form of non-rational expectations: agents may incorrectly weight new information against their prior. I show that this parsimonious model can match the survey data along several dimensions. Using the structure of the model, I estimate the direction and size of inefficiencies in the expectations formation process. I find that in most cases agents put too much weight on their private information, which can be interpreted as overconfidence in the precision of private information. I also show that there is substantial heterogeneity across agents in the deviation from rational expectations, and I relate these differences to observable characteristics. Finally, I discuss potential interpretations of my empirical results and their implications for macroeconomic theory. The third essay explores the potential trade-off between competition and systemic stability in financial intermediation. Why do banks feel compelled to operate with such high leverage despite the risks this poses? Using a simple model, I argue that the degree of competition goes a long way in explaining capital structure decisions. On the one hand, information frictions (adverse selection) render debt a cheaper form of financing than equity. On the other hand, more reliance on debt increases the probability of bankruptcy, which results in the loss of the bank's charter value. The degree of competition affects charter values, and hence changes the way banks balance between these two forces. A panel analysis of European banks' capital structure around the introduction of the euro reveals statistically and economically significant effects consistent with this hypothesis. Banks, in particular smaller banks, decreased their equity ratios after entering the currency area. Complementary evidence suggests that this effect can be attributed to increased competitive pressures boosted by the euro.
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.
Three Essays On The Role Of Financial Frictions In Macroeconomics
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Author : Tobias König
language : en
Publisher:
Release Date : 2022*
Three Essays On The Role Of Financial Frictions In Macroeconomics written by Tobias König and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2022* with categories.
Essays On Financial Frictions In Macroeconomics
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Author : Johannes Pöschl
language : en
Publisher:
Release Date : 2017
Essays On Financial Frictions In Macroeconomics written by Johannes Pöschl 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.
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.
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.