Essays on macroeconomic effects of credit market fluctuations PDF Download

Author: Jagdish Tripathy
Publisher:
ISBN:
Category :
Languages : ca
Pages : 114

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This dissertation includes three chapters on the macroeconomic effects of the financial system, particularly the credit market. In the first chapter, I show a causal link between household credit supply and economic activity using an exogenous shock to household credit supply by Spanish banks in Mexico resulting from macroprudential regulations in Spain. I use the variation in exposure to this shock across Mexican municipalities as a natural experiment and measure the elasticity of lending to the non-tradable sector to changes in household credit ranging from 1.6-3.5. In the second chapter, I show that the Spanish regulations did not affect lending to Mexican firms by Spanish banks. I use firm-level data to show that firms with multiple bank relationships did not experience a change in loan-terms (in levels and interest rates) of marginal credit offered by Spanish banks vis-a-vis the terms offered by non-Spanish banks. I write a theoretical model that accounts for the asymmetric effect of the Spanish regulations on lending to firms and households based on the relationship rents earned by banks depending upon the proprietary information held by them on a given borrower. In the third chapter, I study the effect of asset bubbles in the presence of financial frictions and heterogeneous projects. I consider an economy with two sectors - a productive, financially constrained sector and an unproductive sector with lower levels of financial constraints. Financial constraints create conditions for the existence of asset bubbles. Asset bubbles, in turn, raise interest rates and lower investment productivity by directing financial resources away from the financially constrained, productive sector to the less constrained, unproductive sector. Such bubbles guide the economy to steady states with low levels of consumption that I call bubbly growth traps.

Author: Hugo Vega
Publisher:
ISBN:
Category :
Languages : en
Pages :

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This thesis contains three essays that employ macroeconomic theory to study the implications of volatility, financial frictions and reserve requirements. The first essay uses an imperfect information model where agents solve a signal extraction problem to study the effect of volatility on the economy. A real business cycle model where the agent faces imperfect information regarding productivity is used to address the question. The main finding is that the variance of the productivity process components has a small negative short run impact on the economy's real variables. However, imperfect information dampens the effects of volatility associated to permanent components of productivity and amplifies the effects of volatility associated to transitory components. The second essay presents a partial equilibrium characterization of the credit market in an economy with partial financial dollarization. Financial frictions (costly state verification and banking regulation restrictions), are introduced and their impact on lending and deposit interest rates denominated in domestic and foreign currency studied. The analysis shows that reserve requirements act as a tax that leads banks to decrease deposit rates, while the wedge between foreign and domestic currency lending rates is decreasing in exchange rate volatility and increasing in the degree of correlation between entrepreneurs' returns and the exchange rate. The third essay introduces an interbank market with two types of private banks and a central bank into a New-Keynesian DSGE model. The model is used to analyse the general equilibrium effects of changes to reserve requirements, while the central bank follows a Taylor rule to set the policy interest rate. The paper shows that changes to reserve requirements have similar effects to interest rate hikes and that both monetary policy tools can be used jointly in order to avoid big swings in the policy rate or a zero bound.

Author: Cesar Saturnino Salinas Depaz
Publisher:
ISBN:
Category : Economic development
Languages : en
Pages : 0

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This dissertation consists of three chapters about how access to financial markets and composition of the labor market determine aggregate macroeconomic outcomes. The first chapter examines the macroeconomic consequences of credit uncertainty using a structural vector autoregression model with stochastic volatility (SVAR-SV). Credit supply conditions in the U.S. is captured by the banks' reports on how credit standards for approving loans have change over time (Bank Lending Standards). The empirical analysis shows that the volatility of macroeconomic and financial variables rises in response to an increase in the credit uncertainty shock. The economic activity falls and credit growth and related interest rates decrease persistently. Moreover, credit volatility shocks explain around 10% of the FEV of endogenous variables. A dissagregated analysis shows that the effect of these shocks are mainly explained by their effects on the corporate business sector. The second chapter studies the role of time-varying credit limits through the lens of a life cycle incomplete markets model calibrated for the U.S. Changes in credit card limits are explained by observable household characteristics and the estimated unobservable variation is quite large. The quantitative exercise shows that even though young households are more indebted in an economy with stochastic borrowing limits, aggregate consumption is not greatly affected by transitory or persistent shocks of this type. However, in the presence of these shocks, households lose the ability to self-insure against other uninsurable idiosyncratic shocks, e.g., labor income shocks. A disaggregated analysis shows that the loss of self-insurance capacity is mainly explained by the effects that stochastic borrowing limits have on the wealth distribution, the precautionary savings channel households have to face unexpected risks. The third chapter studies the role of informal markets to explain economic and demographic variables during a pandemic. The quantitative exercise shows that lockdown policies are less effective in economies with large informal markets, infection and death rates will not decrease as much as formal economies. Moreover, the size of the recession would be exacerbated because informal activities are not counted in the calculation of the GDP. To generate similar results to an economy with only formal markets, the economy with informal markets must implement more severe containment policies.

Author: Fernando Mauro Giuliano
Publisher:
ISBN:
Category :
Languages : en
Pages : 104

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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.

Author: Hongyan Zhao
Publisher:
ISBN:
Category :
Languages : en
Pages : 202

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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.

Author: James J. Forest
Publisher:
ISBN:
Category :
Languages : en
Pages :

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This dissertation demonstrates the use of empirical techniques for dealing with modeling issues that arise when analyzing announcement effects in fixed income markets. It describes empirical challenges in achieving unbiased and efficient parameter estimates and shows the importance of modelling a wide range of macroeconomic announcement effects to avoid omitted variable bias. Employing techniques common in Macroeconomics, financial market researchers are better able to provide meaningful results. In "The Effect of Macroeconomic Announcements on Credit Markets: An Autometric General-to-Specific Analysis of the Greenspan Era," I show that a congruent, parsimonious, encompassing model discovered using David Hendry's econometric modelling approach overcomes the many inadequacies of the typical static models of US Treasury returns. The typical specification tends to fail most specification tests. Results suggest a place for general-to-specific modelling in financial economics, a place where it has only recently been employed. In "A High-Frequency Analysis of Trading Activity in the Corporate Bond Market: Macro Announcements or Seasonality?" Here we explore whether factors that drive trading activity of US corporate bond market. Our main findings are that the thinly-traded market for corporate bonds is less affected by surprises in individual economic reports and that the market is dominated by day-of-week and time-of-day affects. We find that, unlike daily returns on the SandP 500, corporate bonds are sensitive to surprises in both labor market and inflation data. Trading activity is affected by absolute surprises in core CPI and nonfarm payrolls, but neither core PPI nor jobless claims affect order flow. Perhaps most interesting, however, is the presence of "behavioral seasonal" effects associated with the onset and incidence of seasonal affective disorder. This "winter blues" effect has been seen affecting activity in equity markets by Kamstra, M. J., L. A. Kramer and M. D. Levi (American Economic Review; 2000, 2003). In "The Effect of Treasury Auction Results on Interest Rates: The 1990s Experience," I examine the response of U.S. Treasury returns to auction announcements. Rate changes differ significantly on auction days for one-year bills. Surprises in the release of bid-to-cover ratios and noncompetitive bidding affect Treasury 30-year returns significantly. Other maturities, however, are relatively unaffected. The results complement the study by Lou, Yan and Zhang (2013) and show the benefits of controlling macroeconomic announcements when analyzing market responses to auctions.

Author: Shuoshuo Hou
Publisher:
ISBN:
Category :
Languages : en
Pages : 0

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This dissertation includes three chapters. The first chapter studies the impact of financial shocks and financial frictions on business cycle dynamics in China's economy. The second and third chapters focus on the driving force of structural change and its impact on aggregate fluctuations using an input-output network approach. In the second chapter, I study two questions: (i) How has the U.S. production network structure changed from 1970 to 2017? (ii) What impact does that have on aggregate fluctuations? This paper shows that a few industries, like Finance and Insurance and Professional Services, have become much more central input suppliers over time, while others, like Paper Manufacturing, have become far less important. Therefore, the third chapter considers the driving force behind such structural change. In particular, I study the question of what determines the size of an industry in a production network. China has been one of the world's fastest-growing economies over the past several decades and emerged quickly from the global financial crisis of 2008. Chapter 1, titled DO FINANCIAL SHOCKS DRIVE REAL BUSINESS FLUCTUATIONS IN CHINA, investigates to what extent financial shocks can shape business cycle fluctuations in China. Specifically, I document the cyclical properties of China's macroeconomy and financial market and show the procyclicality of dividend payout and the countercyclicality of debt repurchases with real GDP. To account for these features, I use the real business cycle model incorporating debt and equity financing developed by Jermann and Quadrini (2012) to study how the dynamics of macroeconomic and financial variables are affected by financial shocks in China. This paper finds that financial shocks contribute significantly to business cycle fluctuations in China and can account for over 60% of the variations in the growth rate of output, investment, hours worked, and debt repurchases. Hulton's Theorem states that the impact of an industry-specific shock on the aggregate economy is entirely captured by the size of this industry, regardless of its position in the production network. Chapter 2, titled THE IMPORTANCE OF INPUT-OUTPUT NETWORK STRUCTURE IN THE US ECONOMY, proposes the idea that the network structure in isolation plays an essential role in shaping GDP growth and growth volatility. First, I introduce a new measure of network structure named centrality dispersion and document that the U.S. production network has become sparsely connected from 1970 to 2017, where many industries relied on a few central input suppliers for production. Such changes are associated with slower GDP growth and higher volatility. To account for this evidence, I embed input-output linkages into a multisector real business cycle model and provide a nonlinear characterization of the impact of network structure quantified using centrality dispersion on the macroeconomy. Finally, I study model-implied relationships between production network structure, GDP growth, and growth volatility. The calibrated model accounts for approximately one-quarter of the variation in real GDP growth and 40% of GDP volatility, as observed in the data. Chapter 3, titled THE NETWORK ORIGIN OF INDUSTRY SIZE VARIATIONS, quantifies the origin of industry size variations using the features of a production network. In the analysis, I perform an exact variance decomposition of industry total sales into the supplier, buyer, and final demand components. The findings suggest that matching with many buyers in the network, especially many large buyers is essential in understanding industry size variations. More importantly, these buyer characteristics have become increasingly important in contributing to industry size variations over the 1967-2012 period. Finally, I provide new empirical evidence related to the decomposition results. The evidence reveals a strengthening negative correlation between industry size and the concentration of customer networks in the long run.

Author: Sang Yup Choi
Publisher:
ISBN:
Category :
Languages : en
Pages : 130

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This dissertation studies how financial market volatility or uncertainty in the U.S. economy affects real economic activity both in the U.S. and other open economies. Chapter 1 critically examines a stylized fact about the effects of uncertainty shocks on the U.S. economy. A link between uncertainty and firms' investment, hiring, and production decisions has drawn much attention in contemporary discussions after the 2008 financial crisis. Bloom (2009) showed that uncertainty events, identified by spikes in stock market volatility, triggered immediate falls in output and employment, followed by rapid rebounds. I show that such stock market volatility shocks failed to produce this same pattern of responses after 1983. Chapter 2 studies the effects of risk aversion shocks, measured by increases in the VIX, on emerging market economies (EMEs). By estimating a structural vector autoregression (VAR) model, I find that, although risk aversion shocks do not have much impact on U.S. output, they do have a noticeable impact on the output of EMEs. To explain the contrast between the impact of risk appetite shocks on EMEs and the impact on the U.S. economy, a credit channel is proposed as a propagation mechanism. In the model, an increase in the VIX is translated to a risk-aversion shock that generates a "flight to quality." As international investors pull their money from EMEs, borrowing costs increase and domestic credit falls as a consequence of credit market imperfections. Higher borrowing costs, in turn, lead to a fall in investment that causes a real depreciation and a decline in total output through sectoral linkages. Finally, Chapter 3, which is co-authored with Prakash Loungani, studies the effect of uncertainty shocks on unemployment dynamics by separating out the role of aggregate and sectoral channels. Using SP500 data from the first quarter of 1963 through the third quarter of 2014, we construct a separate index to measure sectoral uncertainty and compare its effects on the unemployment rate with that of aggregate uncertainty in a standard VAR model, augmented by a local projection method. We find that aggregate uncertainty shocks lead to an immediate increase in unemployment, followed by swift reversals. In contrast, sectoral uncertainty shocks have a long-lasting impact on unemployment, with the peak impact occurring after two years. Our findings highlight an additional channel through which uncertainty shocks have persistent effects on unemployment by requiring substantial inter-industry labor reallocation.

Author: David Abell
Publisher:
ISBN:
Category :
Languages : en
Pages : 173

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This dissertation continues the tradition of identifying the effects of economic shocks to financial intermediaries. Its main contribution is to estimate the size of credit market disruptions in the form of government intervention, asset market crises, and competitive pressures, while using methods that are more novel and appropriate than those of previous work. Chapter 1 examines the effect of the elimination of U.S. banking regulations, which are intended to expand the access of financial services within states and across state-lines, on entrepreneurship activity. It finds that there was increase in small business formation following the deregulation of interstate banking, but not intrastate banking. Results indicate allowing banks to lend and take deposits across state lines increases small business formation by up to 8%. There is a delayed impact following the passage of legislation indicating credit markets require time to adjust to the new regulatory environment. Heterogeneous effects exist across firm sizes in terms of economic impact magnitude and timing. The main contribution of the chapter is that examines the impact on entrepreneurship in separate periods after the initial passing and on subsets of small businesses. Whereas Chapter 1 estimates the effect of a foreseen event, Chapter 2 focuses on the impact of unexpected housing crisis on financial intermediaries loan servicing decisions. As the housing market worsened mortgage lenders could not rely solely on foreclosure processes to reduce losses on homes in default, rather many found the need to engage in modifying loan terms to allow borrowers to continue making mortgage payments. Modifications that increased the affordability of monthly payments were effective at halving the cumulative 36-month redefault rate for mortgages between 2008 and 2011. Findings indicate the improving economy and mortgage risk characteristics are not enough to explain the reduction in redefault. Instead, results find evidence of "learning -by-doing" i.e., servicers become better at targeting borrowers for modification and providing the appropriate payment relief over time. Voluntary government modification programs serve as guidelines for servicers to design and invest in their own modification processes. The impact of this learning by doing is evident before and after controlling for macroeconomic conditions, borrower characteristics, and loan terms. Previous studies do not effectively isolate the improvement in post-modification with an econometric model using a control group similar to this one. Furthermore, other studies consider only particular servicer subsets of mortgage modifications, such as private securitized, whereas the sample here considers all servicer types and payment reducing modifications. Ultimately, the results indicate mortgage modifications were an effective non-foreclosure alternative to keep homeowners in their homes and monthly payments flowing to mortgage servicers. Chapter 3 examines the impact of changes in bank competition on bank capital in the United States. Allen et al. (2011) proposes excessive capital holdings, i.e., capital holdings above regulatory requirements, are attributable to market discipline arising from banks' asset side. Theory predicts competition incentivizes banks to hold higher levels of capital because this indicates a commitment to monitoring to encourage bank stability. I examine heterogeneous impacts of competition on capital over the business cycle and across bank size. Economic downturns usually bring significant changes to bank concentration, which can cause a different impact than during economic booms. Smaller banks can feel different competitive pressures than larger banks due to a focus on local lending activities. I have two main results. More intense competition is associated with higher bank capital ratios at all times (before, during, and after the financial crisis) for small, medium, and large banks. All banks see a larger impact during the crisis period compared to the pre- and post-crisis periods. The findings of this paper can have significant policy implications for the application of anti-trust regulation, since capital ratios are commonly used to restrain individual and systemic bank risk.

Author: Ben S. Bernanke
Publisher: Princeton University Press
ISBN: 0691259666
Category : Business & Economics
Languages : en
Pages : 352

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From the Nobel Prize–winning economist and former chair of the U.S. Federal Reserve, a landmark book that provides vital lessons for understanding financial crises and their sometimes-catastrophic economic effects As chair of the U.S. Federal Reserve during the Global Financial Crisis, Ben Bernanke helped avert a greater financial disaster than the Great Depression. And he did so by drawing directly on what he had learned from years of studying the causes of the economic catastrophe of the 1930s—work for which he was later awarded the Nobel Prize. Essays on the Great Depression brings together Bernanke’s influential work on the origins and economic lessons of the Depression, and this new edition also includes his Nobel Prize lecture.