Download or read book Essays in Financial Stability Under Financial Frictions written by Juan Francisco Martínez S. and published by . This book was released on 2013 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Essays in Financial Stability Under Financial Frictions written by Juan Francisco Martínez Sepulveda and published by . This book was released on 2012 with total page 468 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Essays on Financial Crises written by Kayhan Koleyni and published by . This book was released on 2016 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: The global financial crisis made clear that the financial sector and financial frictions play an integral role in the macroeconomy. Modelers are quickly incorporating these in different ways. This dissertation research also investigates both the causes and effects of financial crises. The first essay, which is mostly empirical, analyzes the impact of the recent U.S. financial crisis on Mexico while the second one, which is theoretical, introduces the Minsky financial friction into the literature as one of the causes of banking and financial crises. In the first essay, we simulate the impact of the U.S. financial crisis on Mexico, a major trading partner with close financial linkages, with the Gali and Monacelli (2005) small open economy DSGE model under two exchange rate regimes: the actual floating and the counterfactual fixed exchange rate regime. We assume the financial crisis generates a supply side shock (a productivity shock) and a demand side shock (a preference shock), which are the driving forces of the model. The results indicate that for both the demand and supply side shocks, the floating exchange rate ameliorates much of the impact on the Mexican economy vis- & agrave;-vis the counterfactual fixed exchange rate regime. Then I consider interest rate adjustments initiated in response by both the U.S. and Mexican monetary authorities. For the fixed exchange rate regime the impulse responses due to the productivity shock on most of Mexico & rsquo;s macroeconomic variables dissipate in less than thirteen quarters, with inflationary effects on price variables and permanent effects on the CPI and Mexico & rsquo;s home goods prices. Under the flexible exchange rate regime the effects of this shock are much smaller, and there is a deflationary effect and negative permanent effects on the nominal exchange rate, the CPI and Mexico & rsquo;s home goods prices. The variance decompositions indicate that the effects on real variables are larger under the fixed exchange rate regime and the external linkages are tighter. Welfare analysis shows that losses under the float are also less vis-a-vis the fixed and two other alternative central bank policy rules. The second essay introduces a new mechanism for financial frictions in a monetary dynamic stochastic general equilibrium model following Minsky & rsquo;s financial instability hypothesis (1977). We expand the Christiano, Trabandt and Walentin (2011) model by introducing three different types of entrepreneurs or borrowers: hedge, speculative and Ponzi borrowers. We change the role of banks from a non-risk taking financial intermediary in the CTW (2011) model to a risky debt accumulator. Then we link the accumulation of debt to the endogenous state of nature, which is absent in the current DSGE literature. The state of nature is endogenously a function of past history and the relative state of the business cycle. So ultimately the bank & rsquo;s profit function is a function of business cycle fluctuations. We also introduce a new type of shock, which we call the & ldquo;Minsky system risk & rdquo; shock. This shock captures excessive system risk that occurs within a banking network due to intermediation and interconnection among banks. Then we calculate the likelihood of a Minsky moment (or financial crisis) endogenously based on the bank & rsquo;s profit maximization problem.

Download or read book Essays on Information and Financial Frictions in Macroeconomics written by Abolfazl Rezghi and published by . This book was released on 2023 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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

Download or read book Essays on Financial Frictions and Productivity written by Isabelle Roland and published by . This book was released on 2016 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Essays on the Real Effects of Financial Frictions written by Patricio Toro Venegas and published by . This book was released on 2016 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Essays on Financial Frictions written by Karl Walentin and published by . This book was released on 2005 with total page 116 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Essays on Money and Financial Frictions in Finance and Macroeconomics written by Xuan Wang and published by . This book was released on 2020 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Essays in Financial Frictions and Asset Returns written by Zhengyu Cao and published by . This book was released on 2019 with total page 140 pages. Available in PDF, EPUB and Kindle. Book excerpt: Chapter 2 examines asset returns in a production economy where firms face two types of aggregate uncertainty, a productivity shock and a financial shock. Borrowing constraints reduce firms' choice set when facing productivity shocks. Exogenous shocks to the financial market distort firms' optimal production plan due to the constraint on firms' working capital. The amount of systematic risk rises, comparing to the standard business cycle model. I develop a quantitative dynamic stochastic general equilibrium model to evaluate the impact of financial uncertainty on equity risk premium. Calibrated to the US data, the model generates sizable equity premium and stable risk-free rate while matching moments of aggregate economic quantities.

Download or read book Money Markets and Jobs written by Eric Tong and published by . This book was released on 2016 with total page 169 pages. Available in PDF, EPUB and Kindle. Book excerpt: This thesis examines three aspects of the global financial crisis: the pre-crisis buildup of bank fragility and the role played by US monetary policy; the market mayhem triggered by asset managers in the wake of US monetary policy normalisation following the crisis; and the labour market consequences of a withdrawal of bank credit following re-evaluation of financial collateral by investors. Using theoretical and empirical methods I show that, while each of these episodes appear as outcomes of an interchange of optimism and panic, they can be interpreted as rational responses by market participants to deep frictions within the economy. Specifically, I find that (i) there is evidence of a global financial cycle in which loose US monetary policy heightens the default risk of banks in other countries; (ii) market panics and the equilibrium allocation of arbitrage capital hinge on the stance of monetary policy. Since arbitrage pro ts depend on expectations of future crises, which are contingent on the actions of central banks, asset managers keen to keep up with their peers may race to sell assets at the same time; (iii) worsening collateral quality does not always trigger screening by banks but, when it does, employers are deprived of funds to hire, triggering job losses. The analysis contributes to the wider debate on the use of monetary and macroprudential policy to foster financial stability.

Download or read book Essays on Uncertainty and Credit Market Frictions written by Givi Melkadze and published by . This book was released on 2019 with total page 280 pages. Available in PDF, EPUB and Kindle. Book excerpt: The dissertation comprises of three chapters. The first chapter studies the role of credit market frictions in transmitting time-varying aggregate uncertainty to economic activity. First, we document that changes in country-specific aggregate volatility are positively correlated with the current account dynamics but negatively correlated with investment, output and credit flows. Then we build an International Real Business Cycle model with credit market frictions that matches these empirical facts. The version of the model with no financial frictions can only account for positive correlation between volatility and current account, but implies counterfactual predictions for the other correlations. In the second chapter we analyze banking crises and lending of last resort (LOLR) in a quantitative model of financial frictions with bank defaults. We find that the LOLR, even if it induces an increase in banks' leverage, is beneficial for small open economies. We show that pools of small economies cannot be successful LOLRs for empirically reasonable levels of liquidity support: They need too many uncorrelated countries or large initial levels of reserves to be sustainable. A country with ample reserves like China can be a sustainable international LOLR. The third chapter analyzes supranational deposit insurance in a quantitative model of financial and sovereign debt crisis. We show that the common deposit insurance fund can bring about sizable economic benefits by weakening an adverse link between domestic banking sector stress and sovereign default risk. The model simulations suggest that the sustainability of such a fund requires a certain number of participating countries with strong fundamentals, while feasibility calls for risk-based insurance premiums. These results can inform the design of the common European deposit insurance fund.

Download or read book Essays on Informational Frictions in Macroeconomics and Finance written by Jennifer La'O and published by . This book was released on 2010 with total page 220 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.

Download or read book Essays on Financial Stability written by Mohamed Bakoush and published by . This book was released on 2019 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Essays on the Real Effects of Financial Market Fluctuations written by Fernando Mauro Giuliano and published by . This book was released on 2015 with total page 104 pages. Available in PDF, EPUB and Kindle. Book excerpt: In the following essays I study the effects of disruptions in financial markets on aggregate outcomes. In the first two chapters, I study the transmission mechanisms from financial crises to the real economy in emerging countries, in environments where firms set heterogeneous markups. The introduction of heterogeneous markups is backed by data: I document that there is evidence of firms setting heterogeneous markups using microdata for Argentina and Colombia. As an endogenous source of resource misallocation across firms, markups can potentially be an important driver of aggregate productivity and output dynamics during large financial crises. The opening chapter is my first attempt to address the role of heterogeneous markups during financial crises. To investigate the extent to which this has a significant quantitative role, I adapt a model of imperfect competition where markups are a function of within-sector market shares. Using microdata from Argentina's annual manufacturing survey, I document that market shares become more disperse during the Argentine 2001-02 crisis. Through the lens of the model this results in increased variability of markups, which decreases aggregate productivity. I perform an accounting exercise and find that markup-induced misallocation can explain between 6.4$\%$ and 15.6$\%$ of the fall in aggregate productivity during the Argentine crisis, or up to one third of the overall effect of resource misallocation. In Chapter 2, joint with Gabriel Zaourak, we explicitly introduce financial frictions to analyze the interaction between credit constraints and variable markups during a credit crunch. Financial frictions take the form of a collateral constraint on working capital. A financial crisis in this framework is modeled as an exogenous shock to the maximum amount of working capital that can be financed externally. Using microdata from financial statements and manufacturing surveys, we calibrate the model to match salient features of the Colombian economy for the 1998-99 financial crisis, and evaluate the transition dynamics of aggregate variables. The model replicates the fall and subsequent recovery of aggregate output and productivity, as well as the concentration patterns observed in the data. We find that in this case variable markups partially offset the resource misallocation triggered by a credit crunch, dampening the response of aggregate variables. The reason is that under variable markups firms try not to change their price (hence quantities) as much as they would under constant markups. This is an example of the ambiguous effect of distortions in a second best world. The last chapter is an early empirical exploration of the link between price fluctuations in financial markets and aggregate labor market outcomes, using data from the United Kingdom. I build a quarterly wealth index from stock market prices and real estate prices for the 1971-2012 period. Using a VECM, I find a robust co-integrating relationship between the unemployment rate and the wealth index. Specifically, fluctuations in wealth Granger-cause the unemployment rate, but not the opposite. This relationship is true for both components of the wealth index individually, and is stable over time. This is consistent with a model where output is demand determined and fluctuations in asset prices affect the unemployment rate through changes in aggregate consumption.

Download or read book Macroeconomics and the Financial System written by N. Gregory Mankiw and published by Macmillan. This book was released on 2011 with total page 642 pages. Available in PDF, EPUB and Kindle. Book excerpt: Watch this video interview with Greg Mankiw and Larry Ball discussing the future of the intermediate macroeconomics course and their new text. Check out preview content for Macroeconomics and the Financial System here. The financial crisis and subsequent economic downturn of 2008 and 2009 was a dramatic reminder of what economists have long understood: developments in the overall economy and developments in the financial system are inextricably intertwined. Derived and updated from two widely acclaimed textbooks (Greg Mankiw’s Macroeconomics, Seventh Edition and Larry Ball’s Money, Banking, and the Financial System), this groundbreaking text is the first and only intermediate macroeconomics text that provides substantial coverage of the financial system.

Download or read book Essays in Financial Stability and Intermediation written by Petros Katsoulis and published by . This book was released on 2021 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Essays in Financial Fragility written by Yuliyan Mitkov and published by . This book was released on 2017 with total page 152 pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation is composed of three separate, but closely related, essays on financial instability. Chapter 1 offers new insights into the fragility-enhancing economic mechanisms at work during the Financial Crisis of 2007-08. Chapter 2 reexamines the effectiveness of recent regulatory measures aiming to mitigate future episodes of financial turmoil. Chapter 3 proposes a novel approach to an old problem in the literature on financial instability, namely how to derive sharper predictions in models with multiple equilibria. In Chapter 1, I explore how the distribution of wealth across households influences the government's response to a banking crisis and the fragility of the financial system. In particular, I analyze a version of the Diamond and Dybvig (1983) model of financial intermediation where households have heterogeneous endowments and a government collects taxes and uses the proceeds to finance the provision of a public good. In addition, if there is a financial panic, the government can use some tax revenue to bail out banks experiencing a run. I show that when the wealth distribution is unequal, the government's bailout policy during a systemic crisis will be shaped in part by distributional concerns. In particular, government guarantees of deposits will tend to be credible for relatively poor investors, but may not be credible for wealthier investors. As a result, wealthier investors will have a stronger incentive to panic and, in equilibrium, the institutions in which they invest are more likely to experience a run and receive a bailout. Thus bailouts, when they occur, will tend to benefit relatively wealthy investors at the expense of the general public. Notice that this result obtains naturally in my setting, without any appeal to political frictions or other factors that would give the wealthy undue influence over government policy. Rising inequality can strengthen this pattern. In particular, one of the effects of higher inequality is to make the panic-and-bailout cycle for the wealthy investors easier to obtain in equilibrium. In some cases, more progressive taxation reduces financial fragility and can even raise equilibrium welfare for all agents. In Chapter 2, which is joint work with Todd Keister, we study the interaction between a government's bailout policy during a banking crisis and individual banks' willingness to impose losses on (or "bail in") their investors. Our interest in this topic is motivated by the fact that, in recent years, policy makers in several jurisdictions have drafted rules requiring financial institutions to impose losses on their investors in any future crisis. These rules aim both to protect taxpayers in the event of a future crisis and to change the incentives of banks and investors in a way that makes such a crisis less likely. While the specific requirements vary, and are often yet to be finalized, in many cases the bail-in will be triggered by an announcement or action taken by the institution facing losses. This fact raises the question of what incentives banks will face when deciding whether and when to bail in their investors. Banks in our model hold risky assets and are free to write complete, state-contingent contracts with investors. In the constrained efficient allocation, banks experiencing a loss immediately cut payments to withdrawing investors. In a competitive equilibrium, however, these banks often delay cutting payments in anticipation of being bailed out. In some cases, the costs associated with this delay are large enough that investors will choose to run on their bank, creating further distortions and deepening the crisis. We discuss the implications of the model for banking regulation and optimal policy design. In Chapter 3, I investigate a new approach to endogenizing the probability of a self-fulfilling outcome in games of coordination. Specifically, a number of important economic phenomena such as currency attacks, bank runs and sovereign defaults can be understood as collective action problems where the players can end up coordinating on one of two different outcomes with markedly different consequences. This multiplicity of possible equilibrium outcomes presents a theoretical challenge since it renders the model predictions and its comparative statics relatively ambiguous. One approach to deriving sharper predictions in collective action problems is the global games framework initially proposed by Carlson and Van Damn (1993) and further developed by Frankel, Morris, and Pauzner (2000). The private sunspot approach is an alternative way of endogenizing the probability of a self-fulfilling event. The purpose of Chapter 3 is to illustrate the logic of the private sunspot approach through a simple example referred to as the Bandit Game. In particular, I analyze a coordination game where two bandits receive an idiosyncratic signal of the realization of a random variable and want to coordinate on attacking a village in order to seize whatever it had produced. By being unrelated to the fundamentals of the environment, this random variable adds uncertainty to the model that is purely extrinsic (i.e. a sunspot). I refer to the bandits' idiosyncratic signals of this random variable as private sunspots (as opposed to public sunspots, which are perfectly observed) and study equilibria where the strategies of the bandits are conditioned on their private sunspot signals. In other words, the private sunspot generalizes the public sunspot approach by introducing strategic uncertainty in the bandits' actions. I show that under certain condition, the private sunspot equilibrium involving an attack on the village will be unique, with the probability of an attack pinned down by the features of the environment.