Theses and Dissertations from UMD
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Item Essays on Firm Dynamics, Local Financial Markets, and the Business Cycle(2018) Blackwood, Glenn Jacob; Haltiwanger, John; Kalemli-Ozcan, Sebnem; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)In this dissertation, I explore the relative importance of financial markets for businesses on both firm-level and aggregate outcomes. In my second chapter, I find empirically that local banking conditions are important for firm-level outcomes, in particular for old and small firms. This finding has two implications, each of which I explore in my second and third chapter, respectively. First, the differential effect across firm age and size suggests sensitivity to financial conditions, or at least to certain financial mechanisms, is correlated with firm characteristics tightly linked with growth (age) and productivity (size). In the quantitative section of my second chapter, I develop a model that is consistent with this differential impact, while at the same time capturing the extreme sensitivity of young businesses to housing prices during the Great Recession. Second, the importance of local banking markets is confirmation of the importance of geographic segmentation. While recent literature has focused on misallocation induced by financial shocks on misallocation within a geographic location, this finding suggests the potential for misallocation across geographies in the context of the United States. In my third chapter, I develop a framework for investigating the relative importance of misallocation within and across geographies, and I explore different types of shocks considered in the literature. I focus on the impact on labor productivity dispersion, which can be directly attributed to misallocation induced by financial frictions in my framework.Item Essays on Macroeconomics and International Finance(2017) Leon-Diaz, John Jairo; Aruoba, Boragan; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)My doctoral research contributes to the fields of macroeconomics and international finance. Within macroeconomics, I have explored the role of financial frictions in shaping macroeconomic outcomes following a recession. I have studied the dissonance between the rapid improvement in financial conditions and the sluggish recovery in investment observed in the aftermath of the Great Recession. In related research I also analyze the fast improvement in financial conditions and analyze the existence of a positive feedback between asset prices and leverage through the lens of liquidity shocks. Within international finance, I have an empirical and theoretical interest in the analysis of capital flows. My research in this area has focused on the role of domestic investors in preventing economies from experiencing the largely-documented pervasive effects of net sudden stops in capital flows, and its determinants. Chapter 1. The rapid improvement in financial conditions and the sluggish recovery of physical investment in the aftermath of the Great Recession are difficult to reconcile with the predictions of existing models that link impaired access to credit and investment. I propose a tractable model that solves this puzzle by exploiting the role of customer markets in shaping the persistent effects of financial shocks on investment decisions. In my model, firms react to a negative financial shock by reducing expenditures in sales-related activities and increasing prices to restore internal liquidity, at the expense of customer accumulation. Once financial conditions start reverting to normal levels, the firm postpones investment due to a shortage of customers relative to its existing production capacity and the need to first rebuild its customer base. This mechanism can capture two important features of the data: First, the slow recovery of investment despite improving financial conditions, and second, the positive correlation between financial conditions and investment observed during downturns and the weakening of this correlation observed during upturns. Chapter 2. I assess how the inclusion of complementary sources of liquidity can have sizeable reinforcing effects during a crisis and in its aftermath. In this paper, I allow for the possibility to finance investment projects either by selling existing capital units or by borrowing using the units not sold as collateral. The main characteristic of this model is that capital is heterogeneous and composed by units of different quality, which are only observed by the owner. The asymmetric information on capital quality makes both, the asset prices at which investors can sell their assets and the loan-to-value (i.e. leverage) ratio at which they can borrow to be endogenously determined. The simultaneity in the determination of asset prices and leverage lead to the existence of liquidity spirals. For instance, a negative exogenous shock that reduces leverage creates a fall in the funds available to finance capital purchases (i.e. a decline in demand). It also increases the supply for assets in the market, since entrepreneurs require selling more units to finance the same amount of investment. These two effects create unambiguously a fall in prices. The fall in prices reinforces the initial fall in loan-to-values since lenders expect the quality of units used as collateral to be lower. This mechanism explains why alternative sources of liquidity fall rapidly during downturns, and why liquidity can recover faster during upturns. Chapter 3. This paper, which is joint work with Eduardo Cavallo and Alejandro Izquierdo, explores the determinants behind the decision of domestic investor to adjust their asset position in response to a variation in gross capital inflows and avoid episodes of net sudden stops. We present evidence that while sudden stops in gross inflows are associated with global conditions, domestic factors such as the degree of domestic liability dollarization, economic growth and institutional background are important to prevent these episodes in becoming net sudden stops. We also extend the concept of “Prevented Sudden Stops” and differentiate “Delayed” from “Purely Prevented” episodes. A purely prevented episode is one in which there is not a sudden stop in any of the quarters for which there was a sudden stop in gross inflows. A delayed episode is one in which there is at least one quarter in which there was both a sudden stop in gross inflows and a net sudden stop. We want to analyze how this classification can affect the extent to which economic growth and domestic liability dollarization can still account for the offsetting behavior of domestic investors.Item ESSAYS ON THE OPTIMAL LONG-RUN INFLATION RATE(2011) Abo Zaid, Salem M.; Chugh, Sanjay K; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)Chapter 1: Optimal Long-Run Inflation with Occasionally-Binding Financial Constraints. This paper studies the optimal inflation rate in a simple New Keynesian model with occasionally-binding collateral constraints that intermediate-good firms face on hiring labor. For empirically-relevant degrees of price rigidity, the optimal long-run annual inflation rate is in the range of half a percent to 2 percent, depending on whether it is TFP risk or markup risk or both that is the source of uncertainty in the economy. The shadow value on the collateral constraint is akin to an endogenous cost-push shock. Differently from usual cost-push shocks, however, this shock is asymmetric as it takes non-negative values only. Inflation is positive when the collateral constraint is binding and it is zero when it does not. Since the mean of this asymmetric endogenous cost-push shock is positive, inflation is also positive on average. In addition, a binding collateral constraint resembles a time-varying tax on labor, which the monetary authority can smooth by setting a positive inflation rate. More generally, the basic result is related to standard Ramsey theory in that optimal policy smoothes distortions over time. Chapter 2: Optimal Monetary Policy and Downward Nominal Wage Rigidity in Frictional Labor Markets. Empirical evidence suggests that nominal wages in the U.S. are downwardly rigid. This paper studies the optimal long-run inflation rate in a labor search and matching framework under the presence of Downward Nominal Wage Rigidity (DNWR). In this environment, optimal monetary policy targets a positive inflation rate; the annual long-run inflation rate for the U.S. is around 2 percent. Positive inflation "greases the wheels" of the labor market by facilitating real wage adjustments, and hence it eases job creation and prevents excessive increase in unemployment following recessionary shocks. These findings are related to standard Ramsey theory of "wedge smoothing"; by following a positive-inflation policy under sticky prices, the monetary authority manages to reduce the volatility and the size of the intertemporal distortion significantly. The intertemporal wedge is completely smoothed when prices are fully flexible. Since the optimal long-run inflation rate predicted by this study is considerably higher than in otherwise neoclassical labor markets, the nature of the labor market in which DNWR is studied can be relevant for policy recommendations. Chapter 3: Sticky Wages, Incomplete Pass-Through and Inflation Targeting: What is the Right Index to Target? This paper studies strict monetary policy rules in a small open economy with Inflation Targeting, incomplete pass-through and rigid nominal wages. The paper shows that, when nominal wages are fully flexible and pass-through is low to moderate, the monetary authority should target the Consumer Price Index (CPI) rather than the Domestic Price Index (DPI). When pass-through is high, an economy with high degrees of nominal wage rigidity and wage indexation should either target the CPI or fully stabilize nominal wages. These results suggest that, by committing to a common monetary policy in a common-currency area, some countries may not be following the right monetary policy rules.Item Risk Aversion, Private Information and Real Fluctuations(2005-07-29) Pardo, Cristian; Shea, John; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)In this dissertation, I further explore the role of the entrepreneurial sector in creating frictions in the economy. I examine the combined effect of private information and entrepreneurial risk aversion on the dynamics of a general equilibrium macroeconomic model. I analyze the impact of these frictions both at the micro level, in terms of the optimal contract between lenders and borrowers, and at the aggregate level within the context of a dynamic stochastic general equilibrium model. This analysis uses a model similar to Bernanke, Gertler and Gilchrist (1999), in which the entrepreneur benefits from private information. Allowing for risk aversion among entrepreneurs modifies the optimal contract by introducing insurance and a risk premium that risk-averse entrepreneurs demand due to the stochastic nature of their investment returns: the private equity premium. This premium, in general equilibrium, may become a mechanism that magnifies and propagates the effects of shocks over time. The model predicts that economies with a relatively larger privately-held sector, all else equal, should be more volatile than economies with a relatively more important corporate sector. I first examine a closed-economy framework, which isolates the role of the private equity premium as a mechanism that magnifies and propagates shocks over time. I then consider a small open economy and examine the role of exchange rates in affecting the private equity premium and the model's dynamics. I find that the exchange rate helps alleviate the propagating feature of the private equity premium. I also execute an exchange rate regime comparison where I show that the greater volatility associated with flexible exchange rate regimes adversely impacts the private equity premium and the supply of capital, amplifying the output response to shocks. I find that fixed exchange rate regimes could be preferable under less restrictive conditions than those commonly found in the literature.