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Author: Cathy Zhang
Publisher:
ISBN: 9781303141652
Category :
Languages : en
Pages : 225
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Book Description
This dissertation consists of three essays on information frictions and liquidity in macroeconomics. The first chapter introduces a form of bounded rationality called adaptive learning in a news-driven economy in order to better explain the depth and persistence of recessions. In doing so, this paper adopts expectational stability ("E-stability") as a natural criterion for rationality. In examining the model's stability properties, I find that when agents do not observe current state variables when forming expectations, the rational expectations equilibrium (REE) is not learnable for calibrated parameter values capable of generating news-driven recessions. The second chapter develops an information-based theory of international currency based on search frictions, private trading histories, and imperfect recognizability of assets. Using an open-economy search model with multiple competing currencies, the value of each currency is determined without requiring agents to use a particular currency to purchase a country's goods. Strategic complementarities in portfolio choices and information acquisition decisions generate multiple equilibria with different types of payment arrangements. While some inflation can benefit the country issuing an international currency, the threat of losing international status puts an inflation discipline on the issuing country. When monetary authorities interact in a simple policy game, the temptation to inflate can lead optimal policy to deviate from the Friedman rule. The third chapter is joint work with Sebastien Lotz and studies the choice of payment instruments in a simple model where both money and credit can be used as means of payment. We endogenize the acceptability of credit by allowing retailers to invest in a costly record-keeping technology. Our framework captures the two-sided market interaction between consumers and retailers, leading to strategic complementarities that can generate multiple steady-state equilibria. In addition, limited commitment makes debt contracts self-enforcing and yields an endogenous upper bound on credit use. Our model can explain why the demand for credit declines as inflation falls, and how hold-up problems in technological adoption can prevent retailers from accepting credit as consumers continue to coordinate on cash usage.
Author: Cathy Zhang
Publisher:
ISBN: 9781303141652
Category :
Languages : en
Pages : 225
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Book Description
This dissertation consists of three essays on information frictions and liquidity in macroeconomics. The first chapter introduces a form of bounded rationality called adaptive learning in a news-driven economy in order to better explain the depth and persistence of recessions. In doing so, this paper adopts expectational stability ("E-stability") as a natural criterion for rationality. In examining the model's stability properties, I find that when agents do not observe current state variables when forming expectations, the rational expectations equilibrium (REE) is not learnable for calibrated parameter values capable of generating news-driven recessions. The second chapter develops an information-based theory of international currency based on search frictions, private trading histories, and imperfect recognizability of assets. Using an open-economy search model with multiple competing currencies, the value of each currency is determined without requiring agents to use a particular currency to purchase a country's goods. Strategic complementarities in portfolio choices and information acquisition decisions generate multiple equilibria with different types of payment arrangements. While some inflation can benefit the country issuing an international currency, the threat of losing international status puts an inflation discipline on the issuing country. When monetary authorities interact in a simple policy game, the temptation to inflate can lead optimal policy to deviate from the Friedman rule. The third chapter is joint work with Sebastien Lotz and studies the choice of payment instruments in a simple model where both money and credit can be used as means of payment. We endogenize the acceptability of credit by allowing retailers to invest in a costly record-keeping technology. Our framework captures the two-sided market interaction between consumers and retailers, leading to strategic complementarities that can generate multiple steady-state equilibria. In addition, limited commitment makes debt contracts self-enforcing and yields an endogenous upper bound on credit use. Our model can explain why the demand for credit declines as inflation falls, and how hold-up problems in technological adoption can prevent retailers from accepting credit as consumers continue to coordinate on cash usage.
Author: Wukuang Cun
Publisher:
ISBN:
Category : Financial crises
Languages : en
Pages : 139
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Book Description
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.
Author: Golam Ashique Habib
Publisher:
ISBN:
Category :
Languages : en
Pages :
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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.
Author: Jennifer La'O
Publisher:
ISBN:
Category :
Languages : en
Pages : 220
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Book Description
This dissertation consists of four chapters analyzing the effects of heterogeneous and asymmetric information in macroeconomic and financial settings, with an emphasis on short-run fluctuations. Within these chapters, I study the implications these informational frictions may have for the behavior of firms and financial institutions over the business cycle and during crises episodes. The first chapter examines how collateral constraints on firm-level investment introduce a powerful two-way feedback between the financial market and the real economy. On one hand, real economic activity forms the basis for asset dividends. On the other hand, asset prices affect collateral value, which in turn determines the ability of firms to invest. In this chapter I show how this two-way feedback can generate significant expectations-driven fluctuations in asset prices and macroeconomic outcomes when information is dispersed. In particular, I study the implications of this two-way feedback within a micro-founded business-cycle economy in which agents are imperfectly, and heterogeneously, informed about the underlying economic fundamentals. I then show how tighter collateral constraints mitigate the impact of productivity shocks on equilibrium output and asset prices, but amplify the impact of "noise", by which I mean common errors in expectations. Noise can thus be an important source of asset-price volatility and business-cycle fluctuations when collateral constraints are tight. The second chapter is based on joint work with George-Marios Angeletos. In this chapter we investigate a real-business-cycle economy that features dispersed information about underlying aggregate productivity shocks, taste shocks, and-potentially-shocks to monopoly power. We show how the dispersion of information can (i) contribute to significant inertia in the response of macroeconomic outcomes to such shocks; (ii) induce a negative short-run response of employment to productivity shocks; (iii) imply that productivity shocks explain only a small fraction of high-frequency fluctuations; (iv) contribute to significant noise in the business cycle; (v) formalize a certain type of demand shocks within an RBC economy; and (vi) generate cyclical variation in observed Solow residuals and labor wedges. Importantly, none of these properties requires significant uncertainty about the underlying fundamentals: they rest on the heterogeneity of information and the strength of trade linkages in the economy, not the level of uncertainty. Finally, none of these properties are symptoms of inefficiency: apart from undoing monopoly distortions or providing the agents with more information, no policy intervention can improve upon the equilibrium allocations. The third chapter is also based on joint work with George-Marios Angeletos. This chapter investigates how incomplete information affects the response of prices to nominal shocks. Our baseline model is a variant of the Calvo model in which firms observe the underlying nominal shocks with noise. In this model, the response of prices is pinned down by three parameters: the precision of available information about the nominal shock; the frequency of price adjustment; and the degree of strategic complementarity in pricing decisions. This result synthesizes the broader lessons of the pertinent literature. However, this synthesis provides only a partial view of the role of incomplete information: once one allows for more general information structures than those used in previous work, one cannot quantify the degree of price inertia without additional information about the dynamics of higher-order beliefs, or of the agents' forecasts of inflation. We highlight this with three extensions of our baseline model, all of which break the tight connection between the precision of information and higher-order beliefs featured in previous work. Finally, the fourth chapter studies how predatory trading affects the ability of banks and large trading institutions to raise capital in times of temporary financial distress in an environment in which traders are asymmetrically informed about each others' balance sheets. Predatory trading is a strategy in which a trader can profit by trading against another trader's position, driving an otherwise solvent but distressed trader into insolvency. The predator, however, must be sufficiently informed of the distressed trader's balance sheet in order to exploit this position. I find that when a distressed trader is more informed than other traders about his own balances, searching for extra capital from lenders can become a signal of financial need, thereby opening the door for predatory trading and possible insolvency. Thus, a trader who would otherwise seek to recapitalize is reluctant to search for extra capital in the presence of potential predators. Predatory trading may therefore make it exceedingly difficult for banks and financial institutions to raise credit in times of temporary financial distress.
Author: Andras Komaromi
Publisher:
ISBN:
Category :
Languages : en
Pages : 154
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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.
Author: Abolfazl Rezghi
Publisher:
ISBN:
Category :
Languages : en
Pages : 0
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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
Author: Christine N. Tewfik
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ISBN:
Category :
Languages : en
Pages : 0
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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.
Author: Sören Radde
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Author: Chia-Ying Chang
Publisher:
ISBN:
Category : Liquidity (Economics)
Languages : en
Pages : 288
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Author: Pablo Daniel Kurlat
Publisher:
ISBN:
Category :
Languages : en
Pages : 131
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This dissertation studies the interaction of liquidity and incomplete or asymmetric information. In Chapter 1, I study a dynamic economy with illiquidity due to adverse selection in financial markets. Investment is undertaken by borrowing-constrained entrepreneurs. They sell their past projects to finance new ones, but asymmetric information about project quality creates a lemons problem. The magnitude of this friction responds to aggregate shocks, amplifying the responses of asset prices and investment. Indeed, negative shocks can lead to a complete shutdown in financial markets. I then introduce learning from past transactions. This makes the degree of informational asymmetry endogenous and makes the liquidity of assets depend on the experience of market participants. Market downturns lead to less learning, worsening the future adverse selection problem. As a result, transitory shocks can create highly persistent responses in investment and output. In Chapter 2, I study why firms can choose to be illiquid. Optimal incentive schemes for managers may involve liquidating a firm following bad news. Fragile financial structures, vulnerable to runs, have been proposed as a way to implement these schemes despite their ex-post inefficiency. I show that in general these arrangements result in multiple equilibria and, even allowing arbitrary equilibrium selection, they do not necessarily replicate optimal allocations. However, if output follows a continuous distribution and creditors receive sufficiently precise individual early signals, then there exists a fragile financial structure such that global games techniques select a unique equilibrium which reproduces the optimal allocation. In Chapter 3, I study speculative attacks against illiquid firms. When faced with a speculative attack, banks and governments often hesitate, attempting to withstand the attack but giving up after some time, suggesting they have some ex-ante uncertainty about the magnitude of the attack they will face. I model that uncertainty as arising from incomplete information about speculators' payoffs and find conditions such that unsuccessful partial defenses are possible equilibrium outcomes. There exist priors over the distribution of speculators' payoffs that can justify any possible partial defense strategy. With Normal uncertainty, partial resistance is more likely when there is more aggregate uncertainty regarding agents' payoffs and less heterogeneity among them.
