Download or read book Essays on Market Frictions Economic Shocks and Business Fluctuations written by Seungho Nah and published by . This book was released on 2010 with total page 129 pages. Available in PDF, EPUB and Kindle. Book excerpt: Abstract: In the first essay, 'Financial Frictions, Intersectoral Adjustment Costs, and News-Driven Business Cycles', I show that an RBC model with financial frictions and intersectoral adjustment costs can generate sizable boom-bust cycles and plausible responses of stock prices in response to a news shock. Booms in the labor market, which make it possible for both consumption and investment to increase in response to positive news, are caused through two channels: the increases in value of marginal product of labor and the increases in value of collateral. Both of these channels enable firms to hire more workers. Intersectoral adjustment costs contribute to both channels by increasing the relative price of output and capital during expansions. Financial frictions enter in the forms of collateral constraints on firms, which influence the latter channel, and the financial accelerator mechanism driven by agency costs, which amplifies all the key variables. My model differs from previous studies in its ability to generate boom-bust cycles without restricting the functional form of consumption in household preferences and without requiring investment adjustment costs, variable capital utilization, or any nominal rigidities. In the second essay, 'Financial and Real Frictions as Sources of Business Fluctuations', I show that a negative shock to a financial or real friction in an economy can generate quantitatively significant and persistent recessions, even without a decrease in exogenous aggregate total factor productivity in a heterogeneous agents DSGE model. The increase in uncertainty that a firm is facing when it makes capital adjustment, however, is found to have a limited or dubious influence on economic activities. The roles of collateral constaints as a financial friction and nonconvex capital adjustment costs as a real friction in aggregate fluctuations are examined in this propagation mechanism. When these frictions become strengthened, the degree of capital misallocation is intensified, which leads to a drop of endogenous aggregate total factor productivity. As agents expect that the return to investment and endogenous TFP decrease, they reduce aggregate investment sharply, which also leads to a drop in employment. Interruption of efficient resource allocation coming from these two frictions is found out to be enough to generate a large and persistent aggregate flucutations even without introducing heterogeneity in firm-level productivity.

Download or read book Essays on Financial Frictions and Business Cycles written by Yankun Wang and published by . This book was released on 2011 with total page 79 pages. Available in PDF, EPUB and Kindle. Book excerpt: In this dissertation I explore the relationship between the frictions in a country's financial market and its business cycle movements. It is well known that the financial market is far from perfect, and shocks originating in such market could have sizable impact on the real economy. On the other hand, evolvement in the financial market could also be a reflection of the real economy. For example, economic downturn often leads to high borrowing cost for a country in the international financial market. The essays in this dissertation present an analysis of this two-way relationship, both qualitatively and quantitatively. The first essay studies the link between country credit spreads - defined as the difference between a home country's cost of borrowing from the international credit market and the world riskless interest rate - and the domestic business cycle fluctuations. By combining both empirical and theoretical analysis, this essay shows that deteriorating credit markets are both reflections of a declining economy and a major factor that depresses economic activity. This study uses a quarterly dataset over the period 1972Q1 to 2010Q1 for South Korea. The second essay probes the importance of financial shocks in creating business cycles in the United States. It starts from a theoretical dynamic stochastic generating equilibrium model, which identifies positive financial shocks as those that drag down the corporate net worth while raising domestic output. An empirical analysis later uses this property to identify financial shocks and study their importance in creating business cycle movement for the U.S. in the past fifty years. This property is in stark contrast to technological shocks, which raise both corporate net worth and total output.

Download or read book Three Essays in Financial Frictions and International Macroeconomics written by Alexandre Kopoin and published by . This book was released on 2014 with total page 118 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.

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 Credit Frictions Debt Choice and the Business Cycle written by Julian Karl Douglas Wright and published by . This book was released on 1995 with total page 212 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Three Essays on Expectation Driven Business Cycles written by Shen Guo and published by . This book was released on 2009 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Three Essays on the Role of Frictions in the Economy written by Meradj Morteza Pouraghdam and published by . This book was released on 2016 with total page 165 pages. Available in PDF, EPUB and Kindle. Book excerpt: In this thesis I have investigated three aspects of market frictions. Chapter 1 is about financial frictions, i.e. frictional forces prevailing in the financial lending markets and how monitoring and legal fines imposed on banks affect financial fragility. Chapter 2 explores the frictional labor market, i.e. frictional forces that prevent the smooth matching process between employees and employers in labor markets. In this chapter I investigate the sources of fluctuations in labor market volatility. Chapter 3 investigates the asymmetrical information in lending markets and how bankruptcy law could potentially affect this asymmetrical information between a borrower and its lenders. In Chapter 1, I have investigated the implications of legal fines and partial monitoring in a macro-finance model. This primary motivation of this work was the unprecedented level of fines banks faced in recent years. The research in this field is very sparse and this work is one of the few to fill in the void. I have tried investigating the implications of fines and partial monitoring in static and dynamic frameworks. There is partial monitoring in the sense that dubious behavior of intermediaries is not always observed with certainty. Moreover intermediaries can pay some litigation fees to mitigate the punishment for their conduct should they get caught. Several insights can be drawn from introducing such concepts in static and dynamic frameworks. Partial monitoring and legal fines make the incentive constraint of intermediaries more relaxed, in the sense that bankers are required to pledge less collateral to raise fund. This decrease in the asset pledgeability pushes the corporate spread down. In a dynamic set-up due to changes in asset qualities caused by such possibilities, recovery in output and credit become sluggish in response to an adverse financial shock. The dynamic implications of the model for the post-crisis period are investigated. This paper calls for further research to broaden our understandings in how legal settlements interact with banks' behaviors. In Chapter 2 (joint with Elisa Guglielminetti) I have investigated the time-varying property of job creation in the United States. Despite extensive documentation of the US labor market dynamics, evidence on its time-varying volatility is very hard to find. In this work I contribute to the literature by structurally investigating the time-varying volatility of the U.S. labor market. I address this issue through a time-varying parameter VAR (TVP-VAR) with stochastic volatility by identifying four structural shocks through imposing robust restrictions based on a New Keynesian DSGE model with frictional labor markets and a large set of shocks. The main findings are as follows. First, at business cycle frequencies, the lion share of the variance of job creation is explained by cost-push and demand shocks, thus challenging the conventional practice of addressing the labor market volatility puzzle à la Shimer under the assumption that technology shocks are the main driver of fluctuations in hiring. Second, technology shocks had a negative impact on job creation until the beginning of the '90s. This result is reminiscent of the "hours puzzle" à la Gali. In Chapter 3 (joint with Garence Staraci) I provide an additional rationale why creditors include covenants in their contracts. The central claim is that covenants are not only included as a means of shifting the governance from debtors to creditors, but also to potentially address the concerns creditors might have about how the bankruptcy law is practiced. To investigate this claim, I take advantage of the fact that covenants are nullified inside bankruptcy. This fact permits us to show that any change to the bankruptcy law affects the spread through changes that it brings to the contractual structure...

Download or read book Essays on Business Cycles in Emerging Economies written by Andrés Fernández Martin and published by . This book was released on 2010 with total page 386 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Essays in the Study of Aggregate Fluctuations written by Dou Jiang and published by . This book was released on 2015 with total page 236 pages. Available in PDF, EPUB and Kindle. Book excerpt: "This thesis consists of three self-contained papers on business cycle fluctuations in the context of the dynamic stochastic general equilibrium framework. The first paper examines how maintenance expenditures affect the occurrence of indeterminacy in a two-sector model economy, motivated by the empirical fact that equipment and structures are maintained and repaired. McGrattan and Schmitz's (1999) survey on `Capital and Repair Expenditures' in Canada indicates that maintenance expenditures account for a substantial fraction of output and new investment. It is shown that the endogenous maintenance expenditures reduce the requirement of the degree of increasing returns to scale to generate sunspot equilibria. In fact, the minimum level of the returns to scale required could be as low as 1.0179. This aspect is important since empirical works such as Basu and Fernald (1997) suggests that returns to scale is close to constant. The second paper addresses the following questions in the context of a neoclassical model of the business cycle: what caused the 1890s and 1907 recessions in the U.S.? In particular, we apply the Business Cycle Accounting method to decompose the economic fluctuation into its sources: productivity, the labour wedge, the investment wedge and the government consumption wedge. Our results suggest that the economy downturn is primarily attributed to frictions that reduce productivity and the wedge capturing distortions in labour-leisure decision. The financial market frictions would have accounted for the drop of the efficiency wedge. A contractionary monetary shock could generate a gap between the marginal rate of substitution and the marginal product of labour. The third paper applies the accounting method proposed by Chari, Kehoe and McGrattan (2007) to identify the primary sources of economic slumps in South Australia from 1990 to 2014. We focus on three major stages: the recession in the early-1990s, the Asian Financial Crisis and the 2008-2012 South Australian slump. Our results show that the efficiency wedge is the primary transmission channel through which the primitive shocks hit the South Australian economy. Shocks such as structural transformation, collapse of motor vehicle industry might have affected the efficiency wedge. Moreover, it is illustrated that infrastructural expenditures are important in increasing the efficiency wedge. This is conformity with the fact that South Australian government is keen to support its development through the Economic Stimulus Plan. Trade openness might also be a contributor." -- abstract, leaves vii-viii.

Download or read book Essays on Technological Change and Financial Markets written by Changho Choi and published by . This book was released on 2011 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: My dissertation investigates several long-standing issues in macro and international macro, specifically questions related to technological change, financial market imperfections and international risk sharing. The first two chapters analyze these issues in a closed economy model, while the third chapter studies these issues in an open economy model. The first chapter examines the role of credit market imperfections in propagating news of future productivity, both theoretically and empirically. The second chapter investigates the technology-hours debate in an economy buffeted by anticipated technology and fiscal policy shocks. The third chapter, jointly written with Yi Chen, examines the role of a recursive preference developed in Epstein and Zin (1989) in explaining the equity home bias puzzle in an otherwise standard two-country endowment-driven open macro model. Viewed as a whole, my dissertation is an effort to connect technological processes with financial markets in macro models in order to further our understanding of macro phenomena. The first chapter investigates the role of credit market imperfections in shaping the response of the economy to news of future productivity, and proposes an alternative view of how news shocks propagate through the economy. In contrast to the conventional wisdom about news of future productivity - that it generates strong booms in the short run - I develop a novel news-driven business cycle model in which credit market imperfections significantly dampen the short-run response of economic activity to news. To exploit the fact that news of future productivity generates an asymmetry between expected returns and the current financial conditions faced by firms, I model credit market frictions as arising from the agency cost problem. In contrast to the limited enforceability problem, the agency cost problem serves to dampen the short-run response of investment because the desire to increase investment due to the higher expected returns is offset by the endogenous rise in the external finance premium in the absence of an actual rise in productivity. This inertial behavior of investment is in turn transmitted to hours worked and final output through the general equilibrium effect. I then estimate the response of economic activity to news shocks using U.S. manufacturing data and find some suggestive evidence for the credit frictions mechanism presented in the model. The main empirical findings are as follows. First, economic activity exhibits a muted response to news shocks during anticipation periods and therefore tracks, rather than leads, the actual change in productivity. Second, news shocks explain a small fraction of output fluctuations. Finally, industries that are more dependent on external finance or exhibit more volatile idiosyncratic productivity growth appear to have a more dampened response to news shocks in the short run. The second chapter investigates the reliability of using the structural vector autoregression (SVAR) evidence on the response of hours to a technology shock to discriminate between two workhorse business cycle models: standard real business cycle models and sticky price models. Given growing attention to the role of news shocks in the business cycle literature, I evaluate the performance of the SVAR procedure when the true data generating process is driven by news shocks about future technology and fiscal policy. The main results are summarized as follows. First, when the SVAR procedure is applied to the data simulated from an economy with unanticipated shocks to the technology process, the estimated impulse responses have the same sign and qualitative pattern as the true responses. Second, when the SVAR procedure is applied to the data generated from an economy with news shocks to the technology process, the estimated impulse responses generally have a different qualitative pattern from the true responses, and frequently they produce opposite signs. The poor performance of the SVAR procedure largely comes from the anticipation of technology, whereas little is attributed to the anticipation of fiscal policy. Third, if the true data generating process is driven by conventional unanticipated technology shocks, a SVAR researcher can be confident about drawing the conclusion about model discrimination. However, if the true data generating process is driven by news about future technology but a researcher still uses the SVAR procedure based on the conventional information assumption, then the probability that a researcher draws the right conclusion about model discrimination falls dramatically. The third chapter, written jointly with Yi Chen, investigates the role of a recursive preference developed in Epstein and Zin (1989) (EZ) in explaining the equity home bias puzzle, and shows that EZ preferences play a role of increasing the home equity share relative to standard CRRA preferences. This happens because EZ preferences generate a long-run risk hedging demand that contributes to a positive covariance between the relative expenditure and the excess equity return. As a result, the local equity is more likely to be a good asset since it pays off more when investors are willing to spend more. Additional main findings are as follows. First, using the least structural information, we show that the degree of equity home bias depends on the conditional covariance-variance ratio between the relative expenditure and the excess equity return, which nests as a special case the standard CRRA models' implication that the equity home bias depends on the conditional covariance-variance ratio between the real exchange rate and the excess equity return. Second, our model is an infinite-horizon model, while standard trade-cost-based explanations work within two-period models in which portfolio adjustment is impermissible by construction. Thus, our model gets the moment representations for the equity home bias right, while two-period trade-cost-based models assume away portfolio adjustment, thereby overstating the relationship between the real exchange rate and the excess equity return.

Download or read book Essays on Macroeconomics with Financial Frictions written by Wei Wang and published by . This book was released on 2015 with total page 206 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.

Download or read book Essays on Macroeconomics and Firm Dynamics written by Lei Zhang and published by . This book was released on 2016 with total page 192 pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation contains three essays at the interaction between macroeconomics and the financial market, with an emphasis on macroeconomic implications of heterogeneous firms under financial frictions. My dissertation explores the relationships among financial market friction, firms' entry and exit behaviors, and job reallocation over the business cycle. Chapter 1 examines the macroeconomic effects of financial leverage and firms' endogenous entry and exit on job reallocation over the business cycle. Financial leverage and the extensive margin are the keys to explain job reallocation at both the firm-level and the aggregate level. I build a general equilibrium industry dynamics model with endogenous entry and exit, a frictional labor market, and borrowing constraints. The model provides a novel theory that financially constrained firms adjust employment more often. I characterize an analytical solution to the wage bargaining problem between a leveraged firm and workers. Higher financial leverage allows constrained firms to bargain for lower wages, but also induces higher default risks. In the model, firms adopt (S,s) employment decision rules. Because the entry and exit firms are more likely to be borrowing constrained, a negative shock affects the inaction regions of the entry and exit firms more than that of the incumbents. In the simulated model, the extensive margin explains 36% of the job reallocation volatility, which is very close to the data and is quantitatively significant. Chapter 2 investigates firms' financial behaviors and size distributions over the business cycle. We propose a general equilibrium industry dynamics model of firms' capital structure and entry and exit behaviors. The financial market frictions capture both the age dependence and size dependence of firms' size distributions. When we add the aggregate shocks to the model, it can account for the business cycle patterns of firm dynamics: 1) entry is more procyclical than exit; 2) debt is procyclical, and equity issuance is countercyclical; and 3) the cyclicalities of debt and equity issuance are negatively correlated with firm size and age. Chapter 3 studies the equilibrium pricing of complex securities in segmented markets by risk-averse expert investors who are subject to asset-specific risk. Investor expertise varies, and the investment technology of investors with more expertise is subject to less asset-specific risk. Expert demand lowers equilibrium required returns, reducing participation, and leading to endogenously segmented markets. Amongst participants, portfolio decisions and realized returns determine the joint distribution of financial expertise and financial wealth. This distribution, along with participation, then determines market-level risk bearing capacity. We show that more complex assets deliver higher equilibrium returns to expert participants. Moreover, we explain why complex assets can have lower overall participation despite higher market-level alphas and Sharpe ratios. Finally, we show how complexity affects the size distribution of complex asset investors in a way that is consistent with the size distribution of hedge funds.

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 Credit Market Imperfections and Business Cycles written by Imen Ben Mohamed and published by . This book was released on 2015 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: The crisis of 2009 raised the question whether the financial conditions matter for the business cycles and the propagation of shocks originating in the financial sphere. I tried to drive a fine analysis of this issue using micro-founded general equilibrium models. The modelling choice was backed by empirical motivations. In three essays, i study the impact of monetary and financial shocks on growth and labour market dynamics. First, an expansionary monetary policy eases credit conditions, raises risk tolerance and the quality of borrowers and generates a liquidity effect. The potency of the monetary policy and the size of the credit channel depend considerably on the degree of financial frictions in the credit market. Second, a restrictive monetary policy shock, an positive credit shock and a positive uncertainty shocks have similar effects on the economy: they plunge the economy in a recession, with output, job creations, and hours worked decreasing, while unemployment and job destructions increase. In all cases the interest rate spread increase, therefore indicating that financial conditions deteriorate, which is interpreted as a sign that financial frictions play a critical role in the propagation of these shocks. Third, the interaction between financial and labour market frictions does exist. The interplay between the two indeed plays a role in propagating the shocks. A shock to net worth, a credit shock and an uncertainty shock play a non-trivial role for the dynamics on the labour market.

Download or read book Essays on Macroeconomics and Cyclical Fluctuations written by Wei Shi and published by . This book was released on 2013 with total page 101 pages. Available in PDF, EPUB and Kindle. Book excerpt: This series of essays studies the observed fluctuations in the aggregate economy and the factors behind. I first examine the cyclical behaviors of the aggregate productivity shocks, as measured by the aggregate Solow residual and how it relates to the technology adoption decision done by individual firms. Then I divert my attention to the labor market, and enquire into (i) why workers with different skills show such significant differences as observed in the U.S. in terms of their unemployment rates and wages; and (ii) what the so-called labor wedge might reflect. The first chapter of my dissertation formalizes Schumpeter's idea that the firm level technological changes are what cause changes in the aggregate Solow residual. The analysis starts with a characterization about how new firms make their technology adoption decision, taking into account both the average productivity of the candidate technology and the risk associated with its adoption. Then through the creative destruction process, these newly adopted technologies gradually prevail in the market, and eventually manifest themselves in the aggregate Solow residual. The quantitative experiments confirm that the Schumpeterian story told in this chapter is able to amplify the traditional aggregate productivity shock, as well as to transform other shocks to the economy into variations in the Solow residual, and thus generating significant business cycle fluctuations. The model also has a few reasonable firm-level implications. The second chapter develops a framework for the study of the labor market dynamics when workers differ in their production efficiency, which I call skills in the chapter, and when there are search frictions. Compared to the standard business cycle model with frictional labor market, skill heterogeneity in my model creates dispersion in the match surpluses between the workers and the firms, and thus necessitates a screening process that results in the termination of the unprofitable matches in equilibrium. This endogenous separation mechanism disproportionately influences the employment status of the less-skilled workers and not only exposes them to larger layoff risks, but also inflicts on them greater difficulties in terms of reestablishing their employment relationship with the firms. Quantitatively, the model has cross-sectional implications for the unemployment rates and the wages that are consistent with the observed differences across skill groups in the U.S. labor market. The last chapter carefully studies the hypothesis that the empirical labor wedge as defined by Robert Shimer may reflect the existence of a household production sector that is largely uncounted by the standard macroeconomic framework. By enriching an otherwise standard real business cycle model with a household production sector, I find that if the hours worked at home and the utility obtained from the home-produced goods are not included in the calculation, the model generates a wedge between the marginal product of labor (MPL) and the household's marginal rate of substitution between consumption and leisure (MRS) that assembles the empirical labor wedge. With reasonable parameter values, the quantitative properties of the model-predicted labor wedge also match those of their empirical counterpart.

Download or read book Hysteresis and Business Cycles written by Ms.Valerie Cerra and published by International Monetary Fund. This book was released on 2020-05-29 with total page 50 pages. Available in PDF, EPUB and Kindle. Book excerpt: Traditionally, economic growth and business cycles have been treated independently. However, the dependence of GDP levels on its history of shocks, what economists refer to as “hysteresis,” argues for unifying the analysis of growth and cycles. In this paper, we review the recent empirical and theoretical literature that motivate this paradigm shift. The renewed interest in hysteresis has been sparked by the persistence of the Global Financial Crisis and fears of a slow recovery from the Covid-19 crisis. The findings of the recent literature have far-reaching conceptual and policy implications. In recessions, monetary and fiscal policies need to be more active to avoid the permanent scars of a downturn. And in good times, running a high-pressure economy could have permanent positive effects.

Download or read book Three Essays on Banking Frictions Uncertainty and Business Cycles written by Byoung Ho Bae and published by . This book was released on 2012 with total page 252 pages. Available in PDF, EPUB and Kindle. Book excerpt: Abstracts: This dissertation studies the role of financial frictions and uncertainty on business cycles in the context of a DSGE (Dynamic Stochastic General Equilibrium) model. In the first chapter, I study the role of the banking sector on business cycles, mainly by focusing on the friction that arises from a bank's portfolio adjustment. Based on empirical evidence, I construct a DSGE model with a banking sector, in which banks adjust the composition of their asset portfolios in response to the economic environment. The quantitative experiment shows that the credit supply-side friction arising from a bank's time-varying portfolio adjustment generates an amplification mechanism and leads to a deeper credit crunch. Furthermore, an economy with an inefficient financial system that requires higher intermediation costs creates a higher level of credit supply-side frictions and that, in turn, leads to the amplification effect of business cycles. The second chapter studies the role of bank capital requirements on business cycles. To this end, I develop a DSGE model with financial frictions arising from moral hazard problems as in Holmstrom and Tirole (1997) together with regulatory capital requirements on the banking sector. I find that financial deepening as measured by a decrease of a financial intermediary's monitoring costs could contribute to mitigating business cycle fluctuations. In addition, this study finds that imposing and increasing capital requirements on the banking sector could lead to a decrease in bank lending, thereby amplifying business cycles. The third chapter studies the effect of uncertainty shocks on the housing market with collateral constraints under a DSGE framework. The quantitative experiment shows that with a standard calibration, increasing volatility in structural shock processes negatively affects housing prices and investment, and that leads to a decrease in output. I also find that higher leverage with a large loan-to-value parameter in collateral constraints amplifies business cycles under uncertainty shocks. In addition, a monetary policy experiment shows that flexible monetary policy with a lower interest smoothing parameter helps to mitigate the fluctuation caused by uncertainty shocks.