Risk Aversion, Private Information and Real Fluctuations

dc.contributor.advisorShea, Johnen_US
dc.contributor.authorPardo, Cristianen_US
dc.contributor.publisherDigital Repository at the University of Marylanden_US
dc.contributor.publisherUniversity of Maryland (College Park, Md.)en_US
dc.description.abstractIn 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.en_US
dc.format.extent588174 bytes
dc.subject.pqcontrolledEconomics, Generalen_US
dc.subject.pquncontrolledAsymmetric and Private Informationen_US
dc.subject.pquncontrolledBusiness Fluctuationsen_US
dc.subject.pquncontrolledRisk Aversionen_US
dc.subject.pquncontrolledFinancial Frictionsen_US
dc.subject.pquncontrolledInternational Financeen_US
dc.subject.pquncontrolledExchange Rate Regimesen_US
dc.titleRisk Aversion, Private Information and Real Fluctuationsen_US


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