Essays on Market Frictions, Economic Shocks and Business Fluctuations

Essays on Market Frictions, Economic Shocks and Business Fluctuations
Title Essays on Market Frictions, Economic Shocks and Business Fluctuations PDF eBook
Author Seungho Nah
Publisher
Pages 129
Release 2010
Genre
ISBN

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

Essays on Financial Frictions and Business Cycles

Essays on Financial Frictions and Business Cycles
Title Essays on Financial Frictions and Business Cycles PDF eBook
Author Yankun Wang
Publisher
Pages 79
Release 2011
Genre
ISBN

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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.

Three Essays in Financial Frictions and International Macroeconomics

Three Essays in Financial Frictions and International Macroeconomics
Title Three Essays in Financial Frictions and International Macroeconomics PDF eBook
Author Alexandre Kopoin
Publisher
Pages 118
Release 2014
Genre
ISBN

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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.

Essays on Informational Frictions in Macroeconomics and Finance

Essays on Informational Frictions in Macroeconomics and Finance
Title Essays on Informational Frictions in Macroeconomics and Finance PDF eBook
Author Jennifer La'O
Publisher
Pages 220
Release 2010
Genre
ISBN

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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.

Essays on Credit Frictions, Debt Choice, and the Business Cycle

Essays on Credit Frictions, Debt Choice, and the Business Cycle
Title Essays on Credit Frictions, Debt Choice, and the Business Cycle PDF eBook
Author Julian Karl Douglas Wright
Publisher
Pages 212
Release 1995
Genre
ISBN

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Three Essays on Expectation Driven Business Cycles

Three Essays on Expectation Driven Business Cycles
Title Three Essays on Expectation Driven Business Cycles PDF eBook
Author Shen Guo
Publisher
Pages
Release 2009
Genre
ISBN

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Three Essays on the Role of Frictions in the Economy

Three Essays on the Role of Frictions in the Economy
Title Three Essays on the Role of Frictions in the Economy PDF eBook
Author Meradj Morteza Pouraghdam
Publisher
Pages 165
Release 2016
Genre
ISBN

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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...