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 the Effects of Financial Frictions in Macroeconomic Dynamics written by Jessica Roldán Peña and published by . This book was released on 2011 with total page 162 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 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 Essays in Macroeconomics and Financial Frictions written by Christine N. Tewfik and published by . This book was released on 2017 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: My dissertation is comprised of three papers on the causes and consequences of the U.S. Great Recession. The emphasis is on the role that financial frictions play in magnifying financial shocks, as well as in informing the effectiveness of potential policies. Chapter 1, "Financial Frictions, Investment Delay and Asset Market Interventions," co-authored with Shouyong Shi, studies the role of investment delay in propagating different types of financial shocks, and how this role impacts the effectiveness of asset market interventions. The topic is motivated by the observation that, during the Great Recession, governments conducted large-scale asset market interventions. The aim was to increase the level of liquidity in the asset market and make it easier for firms to obtain financing. However, firms were observed to have delayed investment by hoarding liquid funds, part of which were obtained through the interventions. We construct a dynamic macro model to incorporate financial frictions and investment delay. Investment is undertaken by entrepreneurs who face liquidity frictions in the equity market and a collateral constraint in the debt market. After calibrating the model to the U.S. data, we quantitatively examine how aggregate activity is affected by two types of financial shocks: (i) a shock to equity liquidity, and (ii) a shock to entrepreneurs' borrowing capacity. We then analyze the effectiveness of government interventions in the asset market after such financial shocks. In particular, we compare the effects of government purchases of private equity and of private debt in the open market. In addition, we examine how these effects of government interventions depend on the option to delay investment. In Chapter 2, "Housing Liquidity and Unemployment: The Role of Firm Financial Frictions," I build upon the role that firms' ability to obtain funding plays in the severity of the Great Recession. I focus specifically on how the housing crisis reduced the ability of firms to obtain funding, and the consequences for unemployment. An important feature I focus on is the role of housing liquidity, or how easy it is to sell or buy a house. I analyze how an initial fall in housing market liquidity, linked to rising foreclosure costs for banks, affects labor market outcomes, which can have further feedback effects. I focus on the role that firm financial frictions play in these feedback effects. To this end, I construct a dynamic macro model that incorporates frictional housing and labor markets, as well as firm financial frictions. Mortgages are obtained from banks that incur foreclosure costs in the event of default. Foreclosure costs also affect the ease with which firms can borrow, and this influences their hiring decisions. I calibrate the model to U.S. data, and find that a rise in foreclosure costs that generates a 10% fall in the firm loan-to-output ratio results in a 3 percentage point rise in the unemployment rate. The rise in unemployment makes it more difficult for indebted owners to avoid defaulting on their mortgage. This rise in default, on the order of 20 percent, creates further slack in the housing market by both increasing the number of houses on the market and reducing the amount of buyers. Consequently, there are large drops in housing prices and in the size of mortgage loans. Notably, when firm financial frictions are absent, I observe a counter-factual fall in the unemployment rate, which mitigates the effects on the housing market, and even results in a fall in the mortgage default rate. The results highlight the importance of the impact of the housing market crisis on a firm's willingness to hire, and how firms' limited access to credit magnifies the initial housing shock. In Chapter 3, "Housing Market Distress and Unemployment: A Dynamic Analysis," I add to the contributions of my second paper, and extend the analysis to determine the dynamic effects of the housing crisis on unemployment. In Chapter 2, I focused on comparing stationary equilibria when there is a rise in the foreclosure costs associated with mortgage default. However, a full analysis must also take into account the dynamic effects of the shock. In order to do the dynamic analysis, I modify the model in my job market paper to satisfy the conditions of block recursivity. I do this by incorporating Hedlund's (2016) technique of introducing real estate agents in the housing market that match separately with buyers and sellers. Doing this makes the model's endogenous variables independent of the distribution of households and firms. Rather, the impact of the distribution is summarized by the shadow value of housing. This greatly improves the tractability of the model, and allows me to compute the dynamic response to a fall in a bank's ability to sell a foreclosed house, thus raising the costs of mortgage default. I find that the results are largely dependent on the size and persistence of the shock, as well as the level of firm financial frictions that are present. When firm financial frictions are high, as represented by the presence of an interest rate premium charged to firms, and the initial shock is large, the shock is transferred to firms via an endogenous rise in the cost of renting capital. Firms scale back on production and reduce employment. The rise in unemployment increases the debt burden for households with large mortgages. They can try and sell, but find it difficult to do so because they must sell at a high price to be able to pay off their debt. If they fail, they are forced to default, thus further raising the mortgage costs of banks, further reducing resources to firms, and propagating the initial shock. However, the extent of the propagation is limited; once the shock wears off, the economy recovers to its pre-crisis levels within two quarters. I discuss the reasons why, and what elements would be needed for greater persistence.

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 Economic Volatility and Financial Frictions written by Hongyan Zhao and published by . This book was released on 2012 with total page 202 pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation consists of three essays in macroeconomics. The first one essay discusses the reasons of Chinese huge foreign reserves holdings. It contributes to the literature of sudden stops, precautionary saving and foreign assets holdings. In the second essay, I study the price volatility of commodities and manufactured goods. I measure the price volatility of each individual goods but not on the aggregated level and therefore the results complete the related study. The third essay explores the correlation between the relative volatility of output to money stock and financial development. It extends the application of financial accelerator model. In the first essay, I address the question of China's extraordinary economic growth during the last decade and huge magnitude of foreign reserves holdings. The coexistence of fast economic growth and net capital outflow presents a puzzle to the conventional wisdom that developing countries should borrow from abroad. This paper develops a two-sector DSGE model to quantify the contribution of precautionary saving motivation against economic sudden stops. The risk of sudden stops comes from the lagged financial reforms in China, in which banks continue to support inefficient state-owned enterprises, while the more productive private firms are subject to strong discrimination in credit market, and face the endogenous collateral constraints. When the private sector is small, the impact on aggregate output of binding credit constraints is limited. However, as the output share of private sector increases, the negative effect of financial frictions on private firms grows, and it is more likely to trigger a nation-wide economic sudden stop. Thus, the precautionary savings rise and the demand for foreign assets also increases. Our calibration exercise based on Chinese macro data shows that 25 percent of foreign reserves can be accounted for by the rising probability of sudden stops. The second essay studies the relative volatility of commodity prices with a large dataset of monthly prices observed in international trade data from the United States over the period 2002 to 2011. The conventional wisdom in academia and policy circles is that primary commodity prices are more volatile than those of manufactured products, although most existing studies do not measure the relative volatility of prices of individual goods or commodities. The literature tends to focus on trends in the evolution and volatility of ratios of price indexes composed of multiple commodities and products. This approach can be misleading. The evidence presented here suggests that, on average, prices of individual primary commodities are less volatile than those of individual manufactured goods. Furthermore, robustness tests suggest that these results are not likely to be due to alternative product classification choices, differences in product exit rates, measurement errors in the trade data, or the level of aggregation of the trade data. Hence the explanation must be found in the realm of economics, rather than measurement. However, the challenges of managing terms of trade volatility in developing countries with concentrated export baskets remain. The third essay tries to understand why the relative volatility of nominal output to money stock is negatively related to countries' financial development level from cross-country evidence. In the paper I modify Bernanke et al. (1999)'s financial accelerator model by introducing the classic money demand function. The calibration to US data shows that the model is able to replicate this empirical pattern quite well. Given the same monetary shocks, countries with poorer financial system have larger output volatility due to the stronger effect of financial accelerator mechanism.

Download or read book Essays on Macroeconomics with Financial Frictions written by Matthew Knowles and published by . This book was released on 2017 with total page 198 pages. Available in PDF, EPUB and Kindle. Book excerpt: "This dissertation consists of three essays concerning the macroeconomic implications of financial market frictions that limit the ability of firms to obtain external finance. Each of the three chapters employs a theoretical macroeconomic model, combined with some empirical analysis, to study unanswered questions in the literature related to the importance of these financial market frictions for the wider economy. The three chapters consider, in turn, the effect of banking crises on investment, output and employment, the implications of financial market frictions for optimal capital taxation, and the effect of banking deregulation on the distribution of income. The first chapter studies the long slumps in output and employment following banking crises. In a panel of OECD and emerging economies, I find that recessions are associated with larger initial drops in investment and more persistent drops in output if they occur simultaneously with banking crises. Furthermore, the banking crises that are followed by more persistent output slumps are associated with particularly large initial drops in investment. I show that these patterns can arise in a model where a financial shock temporarily increases the costs of external finance for investing entrepreneurs. This leads to a drop in investment and a persistent slump in output. Critical to the model is the distinction between different types of capital with different depreciation rates. Intangible capital and equipment have high depreciation rates, leading these stocks to drop substantially when investment falls after a financial shock. If wages display some rigidity, this induces a slump in output and employment that persists for roughly a decade, through the contribution of the decline in equipment and intangibles to declining production and labor demand. I find that this mechanism can account for almost a third of the persistent drop in output and employment in the US Great Recession (2007-2014). In the model, TFP and government spending shocks lead to relatively smaller declines in investment and less persistent drops in output; so the model is also consistent with the more transitory output drops seen after non-financial recessions, where such shocks may have been more important. The second chapter, based on work co-written with Corina Boar, considers the implications of financial market frictions for optimal linear capital taxation, in a setting where the government is concerned with redistribution. By including financial frictions, we emphasize the effect of a new channel affecting the equity-efficiency trade-off of redistribution: taxes affect the allocative efficiency of capital and, ultimately, total factor productivity. We find that high tax rates can be optimal, provided that they are applied to wealth, rather than risky capital. Under plausible parameter values, we find that the optimal tax on risky capital is lower than that on wealth, and roughly in line with current U.S. levels. This suggests welfare gains from taxing wealth at a higher rate than risky capital. The third chapter, based on work co-written with Corina Boar and Yicheng Wang, studies the effect of banking deregulation in the US on the distribution of income, from both a theoretical and empirical perspective. We focus on the effect of the removal of interstate banking and branching restrictions over the 1970-1994 period. We present a theoretical model based on Greenwood and Jovanovic (1990) to illustrate the channels through which this deregulation may affect the income distribution. In the model, income inequality rises after banking deregulation for some values of the parameters--because deregulation decreases the cost of borrowing, which primarily benefits wealthy firm-owners. We empirically estimate the effect of interstate banking and branching deregulation on income inequality by exploiting variations in the timing of deregulation across states. We find that the removal of banking restrictions increased the Gini coefficient by 6 percent in the long run."--Pages ix-xi.

Download or read book Essays on the Role of Durables and Financial Frictions in Business Cycles and International Trade written by Dong Cheng and published by . This book was released on 2018 with total page 191 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Essays on Information Liquidity and Financial Frictions written by Wukuang Cun and published by . This book was released on 2015 with total page 139 pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation seeks to understand how financial frictions arise and how they can affect the economy, and explores the implications of financial frictions for monetary policy during crises. Specifically, Chapter 2 and 3 study the endogenous nature of information asymmetry and explore its implications for financial markets and the macro economy. Chapter 4 studies the potential side effects of large scale asset purchase by central banks. In Chapter 2, I study a dynamic economy in which the information on asset quality is asymmetric and the degree of information asymmetry endogenously varies with the macro-economy, which amplifies the effects of shocks. In the model, firms hold assets of heterogeneous quality and borrow for operating expenses. Production is subject to idiosyncratic shocks, which may force the firms to liquidate their assets to pay off debts. Firms are initially uninformed of the qualities of their assets, but they can acquire private information on their own assets at a cost. Private information is individually beneficial, but it creates a lemons problem that lowers market liquidity and distorts economic decisions. Adverse shocks trigger private information acquisition, which exacerbates the lemons problem. As results, market liquidity drops and economic activity declines. The model can generate larger fluctuations in financial and macroeconomic variables than an otherwise the same model with the level of information asymmetry being fixed. In Chapter 3, I provide a possible explanation for the countercyclical movements in the measures of asset return volatility. In the model, external financing is costly due to the information asymmetry between borrowers and lenders. When the borrowers' financial conditions are worsened, the costs of external financing rise. Borrowers respond by increasing their transparency to outside investors to mitigate information asymmetry, which helps reduce the external financing cost. As a result, returns on external financing instruments disperse and fluctuate more as more information is disclosed, leading to increases in the cross sectional dispersion and the time series volatility of returns. This model can generate countercyclical dispersion, volatility in returns and external finance premium, with correlation coefficients between pairs of these measures quantitatively in line with the data. In Chapter 4, I explore the potential side effects of central bank asset purchase. In the model, commercial banks and shadow banks hold liquid assets as part of their operations. Asset purchases by the central bank decreases the supply of liquid assets that shadow banks can directly hold. When commercial banks do not face binding leverage constraints, shadow banks respond by increasing their deposits in or credit lines from commercial banks and central bank asset purchases are neutral. In the presence of a binding leverage constraint, however, asset purchases create distortions that decrease shadow banks' liquidity holdings and their lending. While conventional wisdom says that central bank asset purchases should be expansionary, I show that central bank asset purchases are necessarily contractionary when the level of bank reserves is high.

Download or read book Essays in Financial Frictions Entrepreneurship and Economic Development written by Rasim Burak Uras and published by . This book was released on 2010 with total page 156 pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation consists of three essays that study the economic implications of financial frictions on entrepreneurial investment decision making and aggregate economic performance. The first essay studies investment horizon choice of a distribution of entrepreneurs when a fraction of the financiers within the economy consists of impatient type of lenders. The second essay studies the effects of financial contract enforcement in promoting productive entrepreneurship and economic development. The third essay studies the link between financial development and entrepreneurial capital-labor management. In the first essay, I study the effects of incomplete insurance in financial contracts on risk taking, investment horizon choice and productivity of a distribution of heterogeneous entrepreneurs. I develop a highly-stylized three-period OLG model in which young financiers are heterogeneous in terms of their liquidity needs. As a result, in the model only a fraction of financiers are patient enough to consider their long term lending opportunities. The lending options of financiers are short and long term and any combination of both which result in either short term or long term investment projects undertaken by entrepreneurs. In this setting, equilibrium investment composition (short term vs. long term) and productivity levels of entrepreneurs are determined by their intrinsic entrepreneurial ability distribution, as well as by the fraction of the patient type of financiers in the economy. When productivity improves, entrepreneurial firms increase their capital investment; however, whether they shift to long term oriented projects or not is strongly linked with the liquidity needs of the financiers. Cross-country data shows a positive correlation between a nation's contract enforcement level and its ability to adopt modern technologies. In the second essay of my dissertation, I study the role entrepreneurial incentives play in shaping this empirical observation. I develop and solve a life-cycle model with limited financial contract enforcement, entrepreneurial heterogeneity (ability and financial pledgeability) and technology choice. In the model production processes can be undertaken using either the Traditional or the Modern technology. Depending on the entrepreneurial ability, the modern technology can be more productive relative to the traditional technology, but the former requires a long-term investment making entrepreneur's pledgeability important in his choice. In equilibrium the level of contract enforcement and entrepreneurial characteristics endogenously determine (1) the investment size and (2) the technology choice. Key results of the paper indicate that when financial contract enforcement is weak, the investment size and the intensity of modern technology use of entrepreneurial firms are positively correlated with financial pledgeability. Collateral-building associated with short term investment is important for the results. I calibrate the model to study its quantitative properties. Quantitative experiments illustrate sizeable positive effects of financial contract enforcement on aggregate output and aggregate modern technology adoption for the U.S. economy. Furthermore, counterfactual analysis shows that if financial contract enforcement in Turkey (a low enforcement economy) improves to the U.S. level (a high enforcement economy), output rises by 13-15%; and one third of this change is due to the increase in the rate of modern technology adoption. The third essay in my dissertation provides a quantitative analysis on the effects of firm level financial characteristics in explaining the observed industry-wide productivity heterogeneity in U.S. firm level data. In the first part of the essay, I develop a model in which the interplay between capital and financial market frictions endogenously determine capital-labor ratio decisions of entrepreneurial firms. In this economy capital is costly to rent to some producers due to investment related moral hazard. Therefore, it is beneficial for such entrepreneurs to purchase the capital good instead of renting it. Entrepreneurs can internalize the cost of capital by borrowing in the financial market. However, the amount which can be borrowed is constrained by an entrepreneurs financial market reputation (pledgeability) and his financial asset liquidity (collateral). In equilibrium, firms with lower pledgeability and/or lower liquidity become more labor intensive relative to firms with higher pledgeability and/or liquidity. Distortions to capital rental rates augment the sensitivity of capital-labor choice with respect to firm level financial pledgeability and liquidity. In the second part of the essay, the analytical results are tested in a panel data analysis. Using proxies for "labor intensive production", "financial pledgeability", and "financial asset liquidity" for a large sample of U.S. firms from Compustat North America, I show that low pledgeability and low asset liquidity are associated with labor intensive production. The third part of the essay provides a quantitative analysis. I choose seven major industries in the U.S. economy. For these industries, I show that ability to borrow against financial pledgeability and asset liquidity mitigate the distortionary effects of non-uniform capital rental rates and decrease intra-industry productivity dispersion while increasing industry total factor productivity by quantitatively important proportions. However, there are differential effects of financial pledgeability and financial asset liquidity on aggregate industry performance. My results suggest that the way sectoral firms benefit from the presence of financial pledgeability and asset liquidity depend on sector specific characteristics.

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 International Trade Capital Flows and Financial Frictions written by Maria Margarita Lopez Forero and published by . This book was released on 2016 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: Two particular concerns in international economics motivate this research: I. How are real and financial activities related to each other in a globalized economy? II. What role do financial frictions play in this relationship ? Three essays look at these questions from different perspectives. The first chapter, in collaboration with Jean-Charles Bricongne and SebastianFranco-Bedoya, revises the old question on the relation between FDI and exports on French firms, where theory seems to be at odds with empirical findings. Most FDI and most trade take place between rich markets, where the horizontal investment type is expected to happen. In this sense, empirical studies have almost invariably found a complementarity relation while standard Horizontal FDI models predict substitutability between FDI and exports given the proximity-concentration trade-off. [...]The second chapter empirically examines how external financial needs measured at the sector level- and financial development at the country level interact to shape the aggregate marginal product of capital of a country (MPK) and its foreign direct investment inflows (FDI). First, using new available data we construct annual aggregate MPK for 50 developing and developed countries during 1995-2008; we use industry-level data to construct an annual country-level measure of external financial dependence and assess its effects on MPK conditional on the level of financial development. Our findings imply that financial development seems to be a necessary condition -and certainly not a sufficient one- in order for production in financially dependent sectors to positively affect aggregate MPK in developing countries. Second, using bilateral FDI inflows in developing countries between 2001 and 2010, we analyze how external financial dependence and financial development determine FDI in flows in developing countries. [...]The third chapter, joint research with Jean-Charles Bricongne and Fabrizio Coricelli, studies the transmission of global shocks during the Great Recession and its impact on French employment. Particularly, we explore the role of trade credit in the propagation of cross-border shocks. Using a sub-sample of importing enterprises that were active over 2004-2009,our findings imply that strong pre-crisis sourcing ties with countries that were more resilient to the global crisis, translated into better performance in terms of employment growth over 2008-2009. This effect dramatically varies with trade credit intensity. Strongly relying on trade credit made firms more vulnerable to unanticipated shocks, for which the adverse impact of the crisis was exacerbated. This effect intensified among firms with important sourcing ties with severely shocked countries. While the negative effect of the crisis was mitigated when sourcing relations with countries subject to milder shocks were stronger. Supporting, therefore, the hypothesis that trade credit was an alternative source of financing for enterprises during the crisis, where implicitly borrowing from suppliers helped importers overcoming financial constraints. Our contribution to the literature adds to the debate on the role of trade finance in explaining the real economic downturn across borders.

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 Firm Dynamics Financial Frictions and the Labor Market written by Dongchen Zhao and published by . This book was released on 2023 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation consists of three chapters. The first chapter concerns the secular changes in the U.S. firm size distribution and firm dynamics. This chapter sets up a quantitative model of firm dynamics with debt heterogeneity to study the implications of changes in real interest rates for the firm size distribution and firm dynamics. It shows that the decline in long-term real interest rates since the early 1980s can account for a significant fraction of the shift in employment shares to large firms as well as the decline in firms per capita and firm entry rates experienced in the U.S. over the same period. In the model, firms endogenously choose financial intermediaries issuing debt with either earnings-based (EBC) or asset-based (ABC) borrowing constraints. The two types of constraints arise naturally from the imperfect enforceability of debt contracts and are in line with recent empirical findings. A decline in real interest rates benefits firms with EBC more because they are not constrained by their assets and can expand more due to increased earnings. Since firms with higher earnings optimally choose earnings-based lending, the decline in real interest rates shifts employment shares to larger firms. Moreover, the growth of large firms crowds out smaller firms and firm entry through general equilibrium effects. The paper tests the mechanism in cross-country data from the OECD and finds a stronger association between the decline in real interest rates and changes in firm dynamics, especially in countries with deeper credit markets. In the second chapter, I study the effects of government regulations on firm dynamism. The impact of government regulations on the economy is a central topic in policy debates. However, due to the endogeneity of regulations and challenges in measuring them, these debates remain contentious. This paper establishes the causal effects of government regulations on firm dynamism by employing a novel shift-share (Bartik) instrument in conjunction with the RegData dataset, which quantifies regulations based on the text of federal regulatory documents. The primary assumption for identification is that, for each sector, the exposure to regulations from different government agencies at the beginning of the period is exogenous to any confounding factors. The findings reveal that government regulatory restrictions significantly increase firm exit rates and discourage the formation of establishments, while having no substantial impact on firm entry. Furthermore, these restrictions contribute to reduced job creation, elevated job destruction, and diminished overall employment. These effects are consistently observed across various age groups. The results lend support to the idea that government regulations can raise production costs for firms and/or enhance the monopolistic power of certain companies. Both mechanisms can diminish the profits of affected firms, leading to increased firm exit rates and reduced labor demand. Additionally, the findings refute the interpretation of regulations as solely serving as entry barriers. The final chapter of the dissertation investigates the labor market outcomes for involuntary part-time workers and their subsequent effects on welfare levels. Through an analysis of survey data, I demonstrate that involuntary part-time workers exhibit reservation wages comparable to those of unemployed workers. This similarity largely stems from parallel wage offers and offer arrival rates. Contrary to previous research, this finding indicates that involuntary part-time workers experience welfare levels akin to unemployed workers. One possible explanation for this discrepancy lies in the methodology of prior studies. Conclusions drawn from earlier research, which primarily focused on the faster transition of involuntary part-time workers into full-time positions compared to other workers, may be flawed. This is because these workers also tend to revert to their previous job types at a faster rate. To further explore the implications of these discoveries, I employ a quantitative search model. The calibrated model supports the assertion that involuntary part-time workers experience welfare levels similar to those of unemployed workers. Furthermore, the model suggests that neither extending unemployment insurance to part-time workers nor enhancing the likelihood that unemployed workers transition to part-time positions would effectively increase the prevalence of full-time employment

Download or read book Essays in Macroeconomics with Financial Frictions written by Eugenio Rojas and published by . This book was released on 2019 with total page 242 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.

Download or read book Essays on the Macroeconomic Effects of Imperfect Banking Competition and Other Financial Frictions written by Jiaqi Li and published by . This book was released on 2019 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: