Download or read book Three Essays on the Role of Financial Frictions in Macroeconomics written by Tobias König and published by . This book was released on 2022* with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Three Essays on Macroeconomics and Financial Frictions written by Tiezheng Song and published by . This book was released on 2019 with total page 153 pages. Available in PDF, EPUB and Kindle. Book excerpt:

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 Three Essays on Financial Frictions and Macroeconomic Dynamics written by Xiangyu Li and published by . This book was released on 2020 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Essays 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 Three Essays in Macroeconomics written by Golam Ashique Habib and published by . This book was released on 2018 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This thesis collects three papers studying topics related to financial frictions and macroeconomics. In Chapter 1, I study how rating agencies affect liquidity and welfare in over-the-counter (OTC) asset markets. My main finding is that when assets are rated matters for welfare and liquidity: When sellers rate the asset prior to matching, then ratings can improve liquidity but their use is fragile. However, a better arrangement is to rate the asset after buyers and sellers meet. Although this arrangement eliminates liquidity distortions and improves welfare, it is difficult to sustain if buyers are not incentivized to follow through with rating the asset. Buyers can overcome this commitment problem by constructing a semi-pooling equilibrium. I use my framework to show that policies that support buyers purchasing ratings can substantially improve market liquidity. In Chapter 2, I propose that an important channel through which financial frictions adversely impact aggregate productivity is by hindering the discovery of productive entrepreneurs. I develop a model where households have imperfect information about the quality of their business idea and show how financial frictions arising from weak contract enforcement systematically reduce access to capital for poor households with good ideas, which undermines their incentive to learn. After calibrating the model to US data, I find that with imperfect information, total factor productivity (TFP) falls by 23% when contract enforcement is lowered to developing country levels, compared to 12% with perfect information. Half of the productivity loss in the economy with imperfect information is due to financial frictions hindering the discovery of good ideas by poor households. I find that these losses can be substantially mitigated by subsidizing young entrepreneurs. In Chapter 3, I present ongoing work with Chaoran Chen and Xiaodong Zhu examining the joint role of financial and managerial frictions in explaining factor misallocation and lower productivity in developing countries. We present a model where weak contract enforcement prevents productive firms from hiring outside managers and expanding production in developing countries, and show that its key features are consistent with cross-country evidence from the IPUMS-International dataset.

Download or read book Financial Integration and Financial Frictions written by Pascal Towbin and published by . This book was released on 2011 with total page 123 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Three Essays in Macroeconomics and Finance written by David Henry Bowman and published by . This book was released on 1993 with total page 230 pages. Available in PDF, EPUB and Kindle. Book excerpt:

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 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 Three Essays in Monetary Economics written by Qiao Zhang and published by . This book was released on 2014 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: In this dissertation, my research aims at dwelling on the questions, at understanding and explaining -- as a follow of current strand of literature on financial frictions -- the mechanisms that allowed the imperfect and perfect credit intermediation to affect the dynamics of economy and the transmission of monetary policy, and providing a new theoretical formulation for evaluating the unconventional monetary policy. To do this, I first considered the impact of financial intermediation on the analysis of central bank transparency issue (Chapter 2). ln Chapter 3, I focused on the role played by the imperfect financial intermediation/financial frictions in the transmission of shocks : through which mechanisms, do the presence of balance-sheet constraint financial intermediaries affect the effect of shocks on the macroeconomy? Finally, in Chapter 4, 1 construct an theoreticalmodel to analyze an important issue which have net been carried out in existing literature: the transmission mechanism of the central bank's large-scale purchase of mortgage-backed securities. ln this chapter, I first simulated a financial crisis to see if the model is able to replicate some of the most important stylized facts of the Great Recession. Then, basing on the simulated crisis, I examine the efficacy and transmission mechanism of large scale purchases of MBS through comparing these purchases to the purchases of corporate bonds. This experiment is conducted in two credit market configurations, i.e., a partially and a totally segmented credit market. The latter case of market condition is considered by many economists as main obstacle that impedes the nominal functioning of the financial markets. ln this work, we have obtained rich and important findings for guiding the use of unconventional monetary policy. The following parts briefly present the findinqs of the thesis.

Download or read book Three Essays in International Macroeconomics written by Susanne Ingrid Karbe and published by . This book was released on 2022 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Essays on Information Frictions and the Macroeconomy written by Andras Komaromi and published by . This book was released on 2015 with total page 154 pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation is a compilation of three essays on the role of information frictions in macroeconomics. The first essay contributes to the literature on the impact of uncertainty on the business cycle. The cross-sectional dispersion of firm-level outcomes, such as sales growth or stock returns, is markedly countercyclical. Recent papers have framed this fact as evidence that exogenous "uncertainty shocks" are important drivers of business cycles. This paper provides empirical evidence that the co-movement of various dispersion measures with the business cycle is better understood as the economy's endogenous response to traditional first moment shocks - dispersion is the effect, not the cause. It then develops a theoretical model that links the cross-sectional dispersion of micro-level outcomes to the aggregate state of the economy. The mechanism is based on time-varying rational inattention. In bad times, firms pay more attention to idiosyncratic shocks hitting their business environment. More precise micro- level information about the underlying heterogeneity leads to higher dispersion in realized outcomes. In line with the empirical findings, the model generates countercyclical dispersion without relying on exogenous second moment (uncertainty) shocks. The second essay uses survey expectations to assess the microfoundations of an important class of macroeconomic models. Many theoretical macro models try to explain the pervasive nominal and real stickiness in the data by assuming rational decision-making under imperfect information. The behavior of consensus (average) forecasts is consistent with the predictions of these models, which can be seen as supportive empirical evidence for the models' microfoundations (Coibion and Gorodnichenko, 2012). This paper demonstrates, however, that the individual-level data underlying the consensus forecasts are at odds with this interpretation. In particular, I document that individual expectations in the Survey of Professional Forecasters do not pass a very weak test of rational expectations: current forecast revisions are strong predictors of subsequent forecast errors. Information frictions alone cannot explain this pattern. I go on to propose a simple modification of the noisy information framework that allows for a particular form of non-rational expectations: agents may incorrectly weight new information against their prior. I show that this parsimonious model can match the survey data along several dimensions. Using the structure of the model, I estimate the direction and size of inefficiencies in the expectations formation process. I find that in most cases agents put too much weight on their private information, which can be interpreted as overconfidence in the precision of private information. I also show that there is substantial heterogeneity across agents in the deviation from rational expectations, and I relate these differences to observable characteristics. Finally, I discuss potential interpretations of my empirical results and their implications for macroeconomic theory. The third essay explores the potential trade-off between competition and systemic stability in financial intermediation. Why do banks feel compelled to operate with such high leverage despite the risks this poses? Using a simple model, I argue that the degree of competition goes a long way in explaining capital structure decisions. On the one hand, information frictions (adverse selection) render debt a cheaper form of financing than equity. On the other hand, more reliance on debt increases the probability of bankruptcy, which results in the loss of the bank's charter value. The degree of competition affects charter values, and hence changes the way banks balance between these two forces. A panel analysis of European banks' capital structure around the introduction of the euro reveals statistically and economically significant effects consistent with this hypothesis. Banks, in particular smaller banks, decreased their equity ratios after entering the currency area. Complementary evidence suggests that this effect can be attributed to increased competitive pressures boosted by the euro.

Download or read book Essays in Macroeconomics with Financial Frictions written by Juan M. Hernandez and published by . This book was released on 2017 with total page 354 pages. Available in PDF, EPUB and Kindle. Book excerpt: How can governments design policies that alleviate the macroeconomic implications of financial frictions? This dissertation contributes to answer this question focusing on two aspects: international borrowing and crisis prevention at the country's level, and the impact of taxation and financial regulation on entrepreneurship at the agent's level. In the first chapter, debt crises arise from the incompleteness of sovereign debt markets: the government cannot credibly commit to repay or default in certain states of the world and this gives way to non-fundamental debt crises. In a strategic default environment, I show that international reserve holdings help to reduce the probability of these market-driven debt crises, advancing the theoretical literature that had struggled to explain why countries hold reserves while indebted. The results are consistent with previous empirical results that had shown countries with greater reserve holdings faced lower spreads in the sovereign debt markets, which is at odds with the previous theories. In the second chapter, a small open economy faces an aggregate borrowing constraint and the agents fail to internalize how their private borrowing decisions push the total debt towards the limit, making the current account adjustment more severe. We model the decentralized and planner's problem and find the optimal capital control policies, these are very effective to move the economy to the first-best scenario but also very hard to implement, given their state contingent nature. We then address the effectiveness of simpler policy rules, and find that they can bring welfare gains but had to be carefully designed. Finally, in the third chapter, the competition among investors for the most promising entrepreneurs, under adverse selection and limited liability, leads to an excessive entry into entrepreneurship activity and allocates resources to socially inefficient projects. We solve the optimal contracting problem and show that the inefficiency disappears if at least one of the next three is missing: competition in financial intermediation, adverse selection or limited liability. We also show that a small cost or fee per contract, like red-tape requirements, is enough to restore efficiency, making a case for financial regulation.

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 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 Macroeconomics with Financial Frictions written by Dominik Thaler and published by . This book was released on 2016 with total page 104 pages. Available in PDF, EPUB and Kindle. Book excerpt: The first chapter of this thesis, joint with Angela Abbate analyses the importance of the risk-taking channel for monetary policy. To answer this question, we develop and estimate a quantitative monetary DSGE model where banks choose excessively risky investments, due to an agency problem which distorts banks’ incentives. As the real interest rate declines, these distortions become more important and excessive risk taking increases, lowering the efficiency of investment. We show that this novel transmission channel generates a new and quantitatively significant monetary policy trade-off between inflation and real interest rate stabilization: it is optimal for the central bank to tolerate greater inflation volatility in exchange for lower risk taking. The second chapter develops a quantitative model of sovereign default with endogenous default costs to propose a novel answer to the question why governments repay their debt. In the model domestic banks are exposed to sovereign debt. Hence sovereign default causes large losses for the banks, which translate into a financial crisis. The government trades these costs off against the advantage of not repaying international investors. Besides replicating business cycle moments, the model is able to generate not only output costs of a realistic magnitude, but also endogenously predicts that default is followed by a period during which no new foreign lending takes place. The duration of this period matches empirical estimates. The third chapter outlines a method to reduce the computationally necessary state space for solving dynamic models with global methods. The idea is to replace several state variables by a summary state variable. This is made possible by anticipating future choices that depend on one of the replaced variables. I explain how this method can be applied to a simple portfolio choice problem.