College of Behavioral & Social Sciences
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Item Essays on Uncertainty, Imperfect Information, and Investment Dynamics(2016) Jia, Dun; Aruoba, Boragan; Stevens, Luminita; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)Understanding how imperfect information affects firms' investment decision helps answer important questions in economics, such as how we may better measure economic uncertainty; how firms' forecasts would affect their decision-making when their beliefs are not backed by economic fundamentals; and how important are the business cycle impacts of changes in firms' productivity uncertainty in an environment of incomplete information. This dissertation provides a synthetic answer to all these questions, both empirically and theoretically. The first chapter, provides empirical evidence to demonstrate that survey-based forecast dispersion identifies a distinctive type of second moment shocks different from the canonical volatility shocks to productivity, i.e. uncertainty shocks. Such forecast disagreement disturbances can affect the distribution of firm-level beliefs regardless of whether or not belief changes are backed by changes in economic fundamentals. At the aggregate level, innovations that increase the dispersion of firms' forecasts lead to persistent declines in aggregate investment and output, which are followed by a slow recovery. On the contrary, the larger dispersion of future firm-specific productivity innovations, the standard way to measure economic uncertainty, delivers the ``wait and see" effect, such that aggregate investment experiences a sharp decline, followed by a quick rebound, and then overshoots. At the firm level, data uncovers that more productive firms increase investments given rises in productivity dispersion for the future, whereas investments drop when firms disagree more about the well-being of their future business conditions. These findings challenge the view that the dispersion of the firms' heterogeneous beliefs captures the concept of economic uncertainty, defined by a model of uncertainty shocks. The second chapter presents a general equilibrium model of heterogeneous firms subject to the real productivity uncertainty shocks and informational disagreement shocks. As firms cannot perfectly disentangle aggregate from idiosyncratic productivity because of imperfect information, information quality thus drives the wedge of difference between the unobserved productivity fundamentals, and the firms' beliefs about how productive they are. Distribution of the firms' beliefs is no longer perfectly aligned with the distribution of firm-level productivity across firms. This model not only explains why, at the macro and micro level, disagreement shocks are different from uncertainty shocks, as documented in Chapter 1, but helps reconcile a key challenge faced by the standard framework to study economic uncertainty: a trade-off between sizable business cycle effects due to changes in uncertainty, and the right amount of pro-cyclicality of firm-level investment rate dispersion, as measured by its correlation with the output cycles.Item Credit and Liquidity in the Macroeconomy(2015) Kreamer, Jonathan; Korinek, Anton; Shea, John; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)This dissertation studies the role of credit and liquidity in macroeconomic fluctuations. Chapter 1 analyzes the effect of endogenous unemployment risk on the dynamics of recovery from a liquidity trap. In a liquidity trap, an adverse demand shock raises unemployment and produces a period of slow hiring. Slow hiring further reduces demand, both for standard precautionary reasons and because credit conditions endogenously worsen, reducing households' ability to borrow and consume. Multiple equilibrium paths exist, and which one the economy follows depends on household expectations and the policy rule adopted by the central bank after the economy exits the trap. Employment remains depressed for a substantial period after an adverse shock because high unemployment increases the dispersion of household debt holdings, slowing the recovery of demand. I find that the initial household debt distribution significantly affects the economy's sensitivity to a demand shock, and study the role of central bank policy in mitigating the initial fall in employment and promoting faster recovery. Chapter 2 explores a novel channel through which financial shocks affect the real economy through the supply of liquidity. I consider a model in which firms require uncertain ongoing financing, and agency costs limit their ability to raise new funds. To secure future financing, firms hold assets to sell if needed, and purchase credit lines from financial intermediaries. I collectively refer to these instruments as liquidity. Financial intermediaries' ability to commit future funds depends on their capital. This creates a linkage between bank balance sheets and the aggregate supply of liquidity. Bank losses raise the liquidity premium and reduce investment. I analyze the optimal supply of public liquidity, and find that when private liquidity is scarce the government should issue bonds for their liquidity properties. I further find that the optimal supply of government debt is decreasing in bank capital. This suggests that in the wake of a financial crisis in which financial intermediaries suffer large losses, governments should increase debt issuance. Chapter 3 considers the distributive implications of financial regulation. It develops a model in which the financial sector benefits from financial risk-taking by earning greater expected returns. However, risk-taking also increases the incidence of large losses that lead to credit crunches and impose negative externalities on the real economy. A regulator has to trade off efficiency in the financial sector, which is aided by deregulation, against efficiency in the real economy, which is aided by tighter regulation and a more stable supply of credit.Item Search Frictions in Macroeconomics(2014) Wee, Shu Lin; Aruoba, Boragan; Haltiwanger, John; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)This dissertation explores the role of search frictions in macroeconomics and highlights how these frictions influence micro-level decisions which in turn affect aggregated outcomes. Chapter 1 examines how individuals entering the job market during a recession can suffer persistent wage losses. I document how entering the job market during a recession not only affects wage outcomes but also severely impinges on early between-career changes. I then build a model that shows how entering the job market during a recession hampers early career mobility which is critical towards facilitating learning about one's comparative advantage and accumulating human capital specific to one's ideal career. Consequently, individuals who choose to switch careers post-recession are forced to restart at lower wages as they lack `relevant' career-specific human capital and certainty over their aptitude in their new careers. Permanent misallocation also arises when marginal workers who, having accumulated sufficient career-specific human capital, find it too costly to switch careers in the recovery. Persistent wage losses are a result of misallocation and experience gaps, both of which take time to correct. Chapter 2 looks at how consumer search behavior and the durability of the product affect firms' strategic pricing decisions. In the model, search is costly and consumers do not get to sample all prices in the market but rather have some positive probability of meeting only one or two sellers. In addition, consumers purchase goods that do not perish immediately and are able to postpone transactions. Firms face two types of customers: loyals and shoppers. The presence of a customer base and search frictions imply that a firm takes into account the consumer search method when setting prices. Durability of the product and the consumer's ability to postpone purchases suggest that consumers have greater bargaining power over the maximum price the firm is able to charge. In the numerical exercises, I show that all else equal, 1) the range of prices supported under durable goods is larger than the range of prices supported for non-durables, and 2) money is not neutral once the presence of a customer base is taken into account.