As a consequence of the Great Recession (2007-09), the standard New Keynesian model for analyzing optimal policy has changed from assuming frictionless financial markets to including financial rigidities. These changes render the new framework suitable for analyzing the interaction between macroeconomic policy and financial events. In the present dissertation, I analyze optimal monetary, unconventional, and macro-prudential policy under commitment. I make use of a model with a banking sector that faces balance sheet constraints. In order to emphasize the role played by monetary policy in containing financial instability, in the first chapter the sole policy instrument is the nominal interest rate. Then, I allow the central bank to make use of additional policy instruments. In the second chapter, the central bank can undertake purchases of private securities. Finally, the third chapter considers the optimal mix between monetary and prudential policy. Chapter 1. In order to emphasize the role played by the monetary policy in containing financial instability, I assume that the sole policy instrument is the nominal interest rate. The main distortions in this economy are: the monopolistic competition, sticky prices, and the balance sheet constraint of banks. Sticky prices allow monetary policy to have real effects. This friction interacts with the financial distortions and create trade-offs for the central bank. If a financial shock hits, the gap between the actual and the efficient allocations widens. This fluctuation is costly and the central bank attempts to stabilize the financial market, but the cost is fluctuation in inflation. The main result of this chapter is that financial events matter. Stabilizing the financial sector is welfare improving, but with only one policy instrument the central bank cannot stabilize inflation and financial variables at the same time. A modified Taylor rule that consider a feedback parameter on the deviations of the cost of credit from its steady state level can implement the optimal policy. However, in this framework there are more objectives than policy instruments. In the next step, I allow the central bank to use asset purchases of private securities and I deal with the optimal mix of conventional and unconventional monetary policy. Chapter 2. In this chapter, I extend the model in chapter 1 in order to allow central bank to undertake direct lending to firms. Asset purchases is the unconventional policy instrument. In this framework, the central bank affect the price of credit (interest rate) and the provision of credit (lending in the private credit markets). The nominal interest rate influences the cost of credit. The credit intermediation by the central bank seeks to influence the availability of and the price of credit. Together, the conventional and unconventional policy can serve to stabilize inflation and the financial markets. The central bank can implement the optimal policy by means of two policy rules: the conventional Taylor rule which sets the nominal interest rate, and an asset purchases rule. Unconventional monetary policy can give a hand to conventional policy in order to stabilize inflation and financial activity. However, if the central bank cannot access to unconventional means to stabilize the economy, monetary policy would still need support from other branches of policy in order to achieve price and financial stability. Even if the economy can be stabilized with monetary policy alone, the question is can it be stabilized more effectively with macro-prudential policies working alongside monetary policy? The model in chapter three is designed to answer this question. Chapter 3. In this chapter, I consider the optimal policy mix between monetary and prudential policy. I make substantial modifications to the model used in chapters 1, and 2, in order to make it useful in assessing macro-prudential policies consistent with the evidence. In the model, the banks face balance sheet constraints. They lend to households and firms. Agent are heterogeneous: firstly, they are poor or rich; secondly, the groups differ by their degree of patience; thirdly, as in the empirical evidence, the poorest contribute more to aggregate consumption than to the aggregate disposable income, I capture this by allowing the poor-borrowers to possess external habits, while the rich-savers possess internal habits in consumption. The habits externality drives these agents to overconsume and to overborrow. Given that consumers with external habits overborrow from banks, there are motives to introducing reserve requirements as a prudential instrument. The reserve requirement acts to reduce the overconsumption. The increase in the reserve requirement makes the credit more expensive and the central bank can stabilize the economy when the shocks hit.

Productivity - the efficiency with which firms transform inputs into outputs - is the root of economic growth and the improvement of living standards. This thesis explores different financial frictions that affect productivity at the corporate level and their aggregate consequences. The first chapter, “Credit Market Frictions and the Productivity Slowdown”, is joint work with John Van Reenen and Timothy Besley. UK labour productivity growth has been particularly weak since the financial crisis. We develop a theoretical framework to quantitatively assess the magnitude of financial frictions and their impact on aggregate productivity. We apply this framework to administrative panel data on UK firms. The approach highlights a firm’s default probability as a sufficient statistic for credit frictions. We use Standard and Poor’s "PD Model" algorithm to measure market participants’ perceptions of firm-specific default risk. The theoretical framework suggests an aggregate measure of credit market inefficiency which we show can be applied to UK administrative panel data to explain how far the dramatic productivity slowdown in the wake of the crisis is due to credit market frictions. We find that credit frictions cause a loss of 7% to 9% of GDP on average per year in 2004-12. These frictions increased during the crisis and lingered thereafter accounting for between one-quarter and one-third of the productivity fall in 2008-2009 and of the gap between actual and trend productivity by the end of 2012. The second chapter, “Management practices, precautionary savings, and company investment dynamics”, investigates a potential channel behind the well-documented positive correlation between the quality of management practices and firm performance. The main hypothesis of the paper is that financially constrained firms accumulate larger cash reserves when they are better managed. This allows them to avoid the costs of underinvestment when future profitable investment opportunities arise. The theoretical analysis predicts that well managed firms which face financial constraints save relatively more out of their cash flows and accumulate more cash when their cash flows are more volatile. This enhanced precautionary behaviour arises because management quality alleviates agency problems between equity holders and managers. The empirical analysis provides evidence to support these predictions using data from the World Management Survey and administrative and accounting data on UK firms. A direct consequence of this enhanced precautionary behaviour is that well managed firms invest more efficiently. Specifically, they adjust more quickly towards their long-run equilibrium capital stock when their current capital stock falls short of the latter. The paper provides evidence of this using a dynamic model of investment. The third chapter, “When Does Leverage Hurt Productivity Growth? A Firm-Level Analysis”, is joint work with Fabrizio Coricelli, Nigel Driffield, and Sarmistha Pal. Following the global financial crisis, several macroeconomic contributions have highlighted the risks of excessive credit expansion. In particular, too much finance can have a negative impact on growth. We examine the microeconomic foundations of this argument, positing a non-monotonic relationship between leverage and firm-level total factor productivity (TFP) growth. A threshold regression model estimated on a sample of Central and Eastern European countries confirms that TFP growth increases with leverage until the latter reaches a critical threshold beyond which leverage lowers TFP growth. We find similar non-monotonic relationships between leverage and proxies for firm value. The fourth chapter, “The sullying effect of credit sclerosis on productivity”, explores the impact of depressed credit flows on productivity in a partial equilibrium search and matching model of the banking market. Reputational costs associated with the termination of lending relationships drive a wedge between rates on new and existing loans. This induces misallocation of capital across borrowers. The phenomenon is one of "credit sclerosis": Low-productivity firms are kept alive through subsidised loan rates, while high-productivity entrants face an inefficiently high cost of borrowing and limited supply of new loan facilities. As a consequence, too much credit is allocated to old firms. Aggregate labour productivity and TFP are reduced. The model also sheds some light on why a policy tool like the UK’s Funding for Lending Scheme might fail to revive productivity in the presence of costly loan termination.

This thesis presents four distinct essays that lie at the intersection of economics and computation. The first essay constructs an abstract framework for defining skills gaps, mismatches and shortages geometrically and thinking about these phenomena in a unified, formal way. It then develops a job matching model with imperfect information, in which skills mismatches influence the job application decisions of the workers, while skills gaps and shortages shape the competition for workers on the resulting bipartite job applications network. The tools proposed in this chapter could in future work be employed as the main ingredients of an agent-based model used to investigate how skills gaps, mismatches and shortages affect equilibrium outcomes. The second chapter designs and tests machine learning algorithms to classify 33 million UK online vacancy postings into STEM and non-STEM jobs based on the keywords collected from the vacancy descriptions and job titles. The goal is to investigate whether jobs in “non-STEM” occupations (e.g. Graphic Designers, Economists) also require and value STEM knowledge and skills (e.g. “Microsoft C#”, “Systems Engineering”), thereby contributing to the debate on whether or not the “STEM pipeline leakage” – the fact that less than half of STEM graduates in the UK work in STEM occupations - should be considered as highly problematic. Chapter 3 relates to empirical growth. It proposes a programming algorithm, called “iterative Fit and Filter” (iFF), that extracts trend growth as a sequence of medium/long term average growth rates, and applies it on a sample of over 150 countries. The paper then develops an econometric framework that relates the conditional probabilities of up and down-shifts in trend growth next year to the country's current characteristics, e.g. the growth environment, level of development, demographics, institutions, etc. Finally, Chapter 4 studies credit risk spillovers in financial networks by modelling default as a multi-stage disease with each credit-rating corresponding to a new infection phase. The paper derives analytical and proposes computer simulation-based indicators of systemic importance and vulnerability, then applies them in the context of the Eurozone sovereign debt crisis.

This thesis contains three chapters examining firms’ behaviour and decision making when they seek to influence policies in the US through lobbying activities. The first chapter studies the main trade-off that firms face when they face the decision to integrate or outsource knowledge workers. The chapter proposes a model that predicts that firms requiring large firm-specific skills, or low levels of issue-specific skills, or facing a large number of transactions will integrate as opposed to outsource the service provider. Using a newly collected dataset on the US federal lobbying industry, I conduct firm-fixed effect estimations and I find strong evidence supporting the theoretical predictions. To provide further empirical evidence, I exploit a quasi-experiment that the Oil and Gas industry faced: The BP oil spill. The spill increased the issue-specific skills needed to conduct advocacy activities and in line with the theory developed in the chapter, I show that the affected industry started using more external, as opposed to internal lobbyists after the oil spill. The second chapter studies the effect of a technological upgrade on firms’ vertical integration decision. I use the model proposed in the first chapter to show that a technological shock, introduced by the Open Government Act decreased the cost of acquiring issue-specific skills, which in turn, made firms less likely to outsource. Then, I use structural models to measure the magnitude of this technological effect and conduct counterfactual exercises to study the influence that the regulation had on the industry. The third chapter studies the relationship between lobbying expenditures and market structure. I show that less and no more concentrated industries spend more on lobbying. To explain this empirical puzzle, I propose a theoretical model that includes the level of excludability in the payoffs. I provide empirical evidence that firms in less concentrated industries tend to lobby for more excludable goods and I show that including this dimension can explain the empirical puzzle. To provide causal evidence, I use national-level mergers that change citylevel market structures. Collecting a new data set of city-level lobbying expenditures, I show that controlling for the level of excludability in the payoffs, more concentrated industries spend more on lobbying efforts.

This thesis consists of three chapters on public and development economics that study incentives in public policies from the perspective of microeconomics. It is devoted to understanding behavioural responses in public policies that are relevant to its design in each domain, including trading in market with frictions, enrolment in education and child marriage practice for young girls, and childcare resource allocation in family. Chapter 1 studies how transaction tax policy affect market with frictions. Transaction tax in property market, with tax rate decreasing in holding period of property, received attention from governments in Asia for moderating speculation since 2000s. Using administrative transaction record of property, this chapter studies the behavioural response to the transaction tax in the timing of transaction, tax incidence and selection of buyers in Hong Kong and Singapore. I find that the inherent tax incentives, in the form of tax notches, induced tax avoidance behaviour in the timing of transaction, and average buyer and seller are willing to wait 3-4 weeks to avoid 1% of transaction tax. Exploiting discontinuity in tax liability at daily level, I find that the tax policy has impact on transaction activity that links closely to its rate and lower the overall chance of a property sold. Buyers bear significant tax burden on seller specific tax even when tax-free sellers are abundant in the market both evidence suggest strong search friction in property market. I also find that the differential tax rate in holding duration produce selection effect among buyers with different ex ante probability of trade in the taxable holding period. This chapter contributes to understanding the nature of transaction tax in markets with search friction. Chapter 2, a joint work with S Roy, studies the impact of matrimonial laws introduced by the British in colonial India during 1800s and early 1900s. Legal reforms on marriage practices, including laws on minimum marriage age and female infanticide, were introduced in British Provinces - district that were under British direct rule. Exploiting quasi-random variations of districts that were former British Provinces within each post-independent Indian states, this chapter studies their impact on female education and under age marriages in post-Independent India. From independent sources of large-scale micro data, including administrative records from schools and representative household surveys, we find that in former British Provinces females have 5% lower chances of marrying under the current legal age, and 1.6% higher chance of attending school at 10-16 years old. Child Marriage abolition Act was introduced in 1931, which raised the minimum age of marriage for female to 14. With newly digitized data on district level marriage pattern from Census of India 1901-1931, we find that the act distorts the marriage market in the short-run by increasing the likelihood of girls marrying at young age as it was preannounced before its implementation, while district more aware of the law exhibit lower child marriage in the long run. It suggest that expansion of education for girls in India has demand side constraints from child marriage practice that has historical root. The introduction of prenatal sex-detection technologies in India has led to a phenomenal increase in abortion of female fetuses. Chapter 3, a joint work with S Anukriti and Sonia Bhalotra investigates their impact on the relative chances of girls surviving after birth, fertility and parental investments. We find that it lead to reduction in excess female mortality, erosion of gender gaps in parental inputs such as breastfeeding and immunization, and moderation of son-stopping fertility. For every five aborted girls, we estimate that roughly one additional girl survives to age five. Our findings have implications that sex-selective abortion not only account for counts of missing girls but also for the later life outcomes of girls.

This thesis contains three essays on the role of tasks and technology in explaining the trends in reallocation of employment across occupations and sectors, and inequalities in the labor market. The first two chapters focus on the task content of occupations with special emphasis on the effect of interpersonal interactions in the changing structure of employment in the labor market. Chapter 1 studies structural change of employment at the task level. Interactions with customers are a key friction against the implementation of potentially better production styles and technologies, since customers are hard to train and should be satisfied according to their tastes. Using a wide range of data sources on tasks, detailed occupation employment, labor productivity, and computer adoption, Chapter 1 develops a novel task measure, interpersonal-service task intensity, to study the growing importance of service activity in the US labor market in recent decades and explores its linkages with technical change. The chapter explains the empirical findings with a model of structural change at the task level which suggests two distinct roles for interpersonal-service intensity and task-routinizability. Concerned with the reallocation of employment jointly across occupations and sectors, Chapter 2 quantifies the impact of interpersonal-service task intensity and routinization on job polarization and structural change of sector employment. I estimate a task-biased technical change model which is capable to address occupation-specific and sector-specific technical change separately and show that substantial portion of occupational and sectoral employment reallocation between 1987 and 2014 in the US can be explained by the two task aspects. While both types of tasks are significant drivers of job polarization, interpersonal-service tasks stand out in explaining the growth of service sector employment. Using the framework I also suggest answers to several issues in the related literature. Chapter 3 switches the focus of study from the task content to skills while keeping the occupation-based perspective. The last chapter studies the importance of within-occupation heterogeneity of skills in understanding the rising labor market inequalities. I document that employment and wage growth of occupations tend to increase monotonically with various measures of skill intensity since 1980 in the US, in contrast to the existing interpretation of labor market polarization along occupational wages. I establish robustness of the documented fact, explore the sources of the seemingly contrasting finding and argue that labor market polarization cannot be interpreted as polarization of skills that are comparable across occupations. The chapter reconciles the documented facts in an extended version of the canonical skill-biased technical change model which incorporates many occupations and within-occupation heterogeneity of skill types.

This thesis consists of three papers that examine sorting and inequality. In the first paper I present a model in which people sort into groups according to income and as a result become biased about the shape of the income distribution. Their biased beliefs in turn affect who they choose to interact with, and hence there is a two-way interaction between segregation and misperceptions about society. I show one possible application of this novel framework to the question of income inequality and the demand for redistribution. I demonstrate that under segregation an increase in income inequality can lead to a decline in perceived inequality and therefore to a fall in people's support for redistribution. I motivate my main assumptions with empirical evidence from a small survey that I conducted via Amazon Mechanical Turk. In the second paper I develop a general model of how social segregation and beliefs interact. Sorting decisions will be affected by beliefs about society, but these beliefs about society are in turn influenced by social interactions. In my model, people sort into social groups according to income, but become biased about the income distribution once they interact only with their own social circle. I define "biased sorting equilibria", which are stable partitions in which people want to stay in their chosen group, despite their acquired misperceptions about the other groups. I introduce a refinement criterion - the consistency requirement - and find necessary and sufficient conditions for existence and uniqueness of biased sorting equilibria. In the third paper I present a model in which a monopolist offers citizens the opportunity to segregate into groups according to income. I focus initially on the case of two groups and show that a monopolist with fixed costs of offering the sorting technology will see profits increase as income inequality increases. I then analyze how the monopolist's optimal group partition varies with inequality and show that for a broad field of income distributions, monopolist profits increase with inequality, while at the same time total welfare of sorting given the monopolist's optimal schedule decreases. In the last section I examine how these findings generalize if the monopolist doesn't face costs of offering the sorting technology and can therefore offer as many groups as she wants.

The goal of this dissertation is to contribute to the literature on labour market properties of business cycle fluctuations for emerging market economies (EMEs) by using DSGE modelling and time series analysis. It consists of three essays and the following related topics are analysed. In the first paper, entitled "Labour Market Fluctuations: An RBC Model for Emerging Market Economies", we examine the labour market properties of business cycle fluctuations for a group of 15 EMEs and the US using annual data from 1970 to 2013. We find that on average, hours worked and employment volatility (relative to output volatility) are lower, while the volatility of productivity and wages are 2-3 times higher in EMEs than in the US. We then assess the performance of a standard RBC model with temporary and permanent productivity shocks to explain those facts observed in the data. We find that this model can account reasonably well for the relative volatility of hours to output; however, it fails to capture for the rest of the relevant moments for EMEs. In order to further improve the fit, we augment this model with capacity utilization, investment adjustment cost and indivisible labour. We find that each of these extensions improves the capability of the RBC model. Especially the model with investment adjustment cost improves its performance regarding the relative volatility of wages and hours, as well as the cyclicality of hours, compared to the standard RBC model. Lastly, we investigate the cyclical properties of the labour wedge (the wedge between the marginal product of labour and the marginal rate of substitution of consumption for leisure) and find that the total labour wedge (relative to output volatility) is more volatile over the business cycle in emerging economies (1.72) compared to the US (0.95). Further, fluctuations in the total labour wedge reflect the ones in the household component rather than the firm component of the wedge in EMEs and the US. In the second paper, entitled "Technology Shocks, Non-stationary Hours in Emerging Countries and DSVAR", we test a standard DSGE model on impulse responses of hours worked and real GDP after technology and non-technology shocks in EMEs. Most dynamic macroeconomic models assume that hours worked are stationary. However, in the data, we observe apparent changes in hours worked from 1970 to 2013 in these economies. Motivated by this fact, we first estimate a SVAR model with a specification of hours in difference (DSVAR) and then set up a DSGE model by incorporating permanent labour supply (LS) shocks that can generate a unit root in hours worked, while preserving the property of a balanced growth path. These LS shocks could be associated with very dramatic changes in labour supply that look permanent in these economies. Hence, the identification restriction in our models comes from the fact that both technology and LS shocks have a permanent effect on GDP yet only the latter shocks have a long-run impact on hours worked. For inference purposes, we compare empirical impulse responses based on the EMEs data to impulse responses from DSVARs run on the simulated data from the model. The results show that a DSGE model with permanent LS shocks that can generate a unit root in hours worked is required to properly evaluate the DSVAR in EMEs as this model is able to replicate indirectly impulse responses obtained from a DSVAR on the actual data. In the last paper, entitled "Informal Employment and Business Cycles in Emerging Market Economies", we examine the relationship between informal employment and business cycles in EMEs and investigate how informal employment is relevant in shaping the aggregate dynamics in these economies. The key features of stylized facts from our data is that it is countercyclical in Mexico, Colombia and Turkey but pro-cyclical in South Africa. In addition, informal employment is negatively correlated with formal employment in Mexico but positively correlated in Colombia, South Africa, and Turkey. To account for these empirical findings, we build a small open economy model with both formal and informal labour markets, and it subjects to stationary and trend shocks to total factor productivity. We also allow labour adjustment costs in the model as strict employment protection which differ among these economies. We then examine the effect of changes in the degree of employment protection on the informal employment and the business cycles in EMEs and the extent to which the informal sector acts as a buffer in the face of adverse shocks to the labour market. The results show that this model can capture some key stylized facts of the labour market in these economies and that the informal sector acts as a propagation mechanism for these shocks. Moreover, informal employment acts as a buffer as it is countercyclical while formal employment is pro-cyclical in the model which supports the results from the data except for South Africa. Regarding volatilities, informal employment does not act as a buffer since formal employment is more volatile than informal employment in the model which contrasts with the evidence in the data for these economies except Colombia.

The implementation of employee ethnic representation has become a widespread practice for organisations operating within multi ethnic societies. However, scholars disagree on its effectiveness in positively influencing employees’ perceptions. Also, the process through which ethnic identification positively influences employee perceptions is currently unknown. The purpose of this study is to investigate the process through which ethnic identification influences employee psychological ownership perception. To achieve this aim, the thesis first reviews relevant literature which highlights the gap in literature and support the need for this study. For example, existing studies have not considered the components of psychological ownership and how they are influenced. This study contributes by showing that psychological ownership perception is a formative construct comprised of three distinct components; employee self-efficacy, organisational self-identity and employee voice. A review of literature on the empirical context show the importance of this study within the Nigerian context specifically noting Nigerians displayed high levels of ethnic identification. The problem that persist for organisations was how ethnic identification may be channelled to organisational identification. A quantitative cross-sectional survey data collection approach was adopted for this study. Structural equation modelling was used to analyse survey responses from 1,525 employees of selected public and private sector organisations in Rivers State, Nigeria. Findings suggest the following relational framework for linking ethnic diversity and employee psychological ownership perception; that employees who overtly identify with their ethnicity at work will positively attract co-worker social support and this is possible in an organisational climate that promotes interpersonal fairness. Co-worker social support positively mediates the relationship between employee ethnic identification and employee psychological ownership perception. The practical implication for organisations operating within a multi ethnic environment is human resource practitioners to pay attention to ethnic identification because of its influence on co-worker social support and employee psychological ownership perception. The originality of this thesis is seen in the relational framework designed to link ethnic diversity to employee psychological ownership perception. This study contributes to existing literature by explaining how employees’ ethnic identification influences their perception of psychological ownership. The study provides new insights on the components of employee psychological ownership perception and how they relate to ethnic identity. The investigation of psychological ownership perception at the individual component level is novel and provides new insight into how psychological ownership relates with antecedents that influences it.

This thesis contributes to the literature on strategic information transmission through providing new insights into strategic behavior under several communication frameworks. The thesis is comprised of five chapters. Chapter 1 provides an overview of the main topics and research methodologies presented in the next three chapters. Chapter 2 reports experiments in sender-receiver games with partially verifiable messages. We explore the role of verification control on strategic behavior and final outcomes. We find that behavior is closer to theoretical predictions when senders have verification control. However, the setting in which receivers have control over the verification action promotes higher average payoffs despite behavior being noisier. Chapter 3 investigates the effect of cheap talk on the interpretation of partially informative verifiable communication (evidence). Using experimental data from sender-receiver games similar to those in chapter 2 we find that cheap talk distorts receivers’ appraisal of evidence. Specifically, it makes receivers depart from theoretical predictions more than they do in a treatment where cheap talk is not present. Chapter 4 explores the effect of cheap talk in a sender-receiver game with sender state independent preferences and a state space with non-uniform distribution. This type of state space leads to the interests of the players to be either more likely aligned, or more likely conflicting. Using a simple theoretical analysis we show that if receivers dislike taking an action that is profitable for a deceiving sender (“sucker aversion”), communication can harm when interests are more likely aligned. However, when interests are more likely conflicting, communication helps due to senders’ “lying aversion”. We run experiments to test these predictions and find no effect of cheap talk when interests are more likely aligned. When interests are more likely conflicting, communication has a positive effect on payoffs but not due to the hypothesized mechanism. Chapter 5 provides a summary of the previous chapters’ results as well as a discussion which points out the limitations. Finally it delineates welcomed directions for future research.