Thesis advisor: Fabio Ghironi / This thesis studies the role of product and labor market frictions for the propagation of shocks in closed and open economy. The first chapters focuses on the consequences of relaxing product and labor regulation for macroeconomic outcomes. Specifically, we study long and short to medium run effects of deregulation by developing a Dynamic Stochastic General Equilibrium model featuring endogenous producer entry and search and matching frictions in the labor market. We calibrate the model to reproduce salient features of countries belonging to the Euro Area which are characterized by large barriers to entry, firing restrictions and unemployment benefits. We analyze the effects of single policy changes and a global reform in which product and labor market regulations are set at the current U.S. level. Three main results emerge. First, we show that deregulation -- either partial or global - would trigger adjustment costs in the short run, increasing unemployment and reducing consumption. Long run welfare gains would make up for short run costs. Second, reforms are interdependent as the effects of a policy change in one market depend upon the level of regulation prevailing in the other. Third, regulation has important consequences for the business cycle properties of the economy. After a full deregulation, the Euro Area would become more responsive to exogenous disturbances but the absorption of shocks would be quicker. Our findings suggest that concerns about the negative effect of strict regulation for the speed of recovery from downturns could be well placed. The second chapter studies how country-specific labor market frictions -- hiring and firing restrictions and protection of unemployed workers -- affect the consequences of trade integration. We address this question in a two-country model of trade and macroeconomic dynamics with heterogeneous firms, endogenous producer entry, and search and matching frictions in the labor market. We study the dynamic effects of trade integration on unemployment and economic activity and the business cycle implications of stronger trade linkages. The model introduces a novel source of amplification and propagation of domestic and international shocks, as fluctuations in job creation and destruction affect the profitability of producer entry into domestic and export markets. Structural differences in labor markets translate into asymmetric entry and export dynamics across countries. As trade barriers are reduced, unemployment initially rises (falls) in countries with more rigid (flexible) labor markets. In the long run, average productivity gains ensure positive employment effects in both countries. Trade is always beneficial for welfare, but the economy with a rigid labor market gains less. Integration has also important business cycle consequences. In contrast to benchmark international real business cycle models, but consistent with the data, the model predicts that trade integration leads to increased business cycle synchronization. Volatility increases in the country with a rigid labor market, but it falls for the flexible partner. / Thesis (PhD) — Boston College, 2010. / Submitted to: Boston College. Graduate School of Arts and Sciences. / Discipline: Economics.

Thesis advisor: Peter Ireland / My dissertation consists of three papers on business cycles in developing countries. All the papers are different from each other and emphasize different aspects of understanding economic fluctuations in developing countries. The first paper is titled `Medium Term Business Cycles in Developing Countries' (with Diego Comin, Norman Loayza and Luis Serven). This paper models the link between business cycle fluctuations in developed countries with fluctuations in developing countries. Business cycle fluctuations in developed economies tend to have large and persistent effects on developing countries. We study the transmission of business cycle fluctuations from developed to developing economies with a two-country asymmetric DSGE model with two important features: (i) endogenous and slow diffusion of technologies from the developed to the developing country, and (ii) adjustment costs to investment flows. Consistent with the model, we observe that the flow of technologies from developed to developing economies co-moves positively with output in both developed and developing countries. After calibrating the model to Mexico and the U.S., it can explain the following stylized facts: (i) U.S. and Mexican output co-move more than consumption; (ii) U.S. shocks have a larger effect on Mexico than in the U.S.; (iii) U.S. business cycles lead over medium term fluctuations in Mexico; (iv) Mexican consumption is more volatile than output. The second paper of my dissertation is based on a price setting survey conducted by the State Bank of Pakistan (Central Bank). The paper is titled `Price-Setting Discoveries: Results from a Developing Country' (with M. Ali Choudhary, Abdul Faheem, Nadeem Hanif, and Saima Naeem) present the results of 1189 structured face-to-face interviews about price-setting behavior of the formal firms in the manufacturing and services sector of Pakistan. The key findings of the survey are:the frequency of price change is high in Pakistan, lowering the real impact of monetary policy. Price rigidity is mainly explained by firms caring about relative prices and the persistence of shocks. The exchange-rate and cost shocks are more important than financial and demand shocks for both setting prices and also the readiness with which these shocks pass-through to the economy. Formal sector firms with connections to the informal sector, especially through demand, have a lower probability of price adjustment. The lack of taxes and compliance with tax regime, i.e. enforcement are held responsible for existence of the informal sector by formal sector firms. The results from this paper provided motivation for the last paper of my dissertation about understanding and modeling the business cycle fluctuations in a developing economy like Pakistan. The last paper of my dissertation is titled `Modeling Business Cycles in Pakistan: A First Step'. In this paper, I establish the nature of short-run fluctuations of the Pakistani economy over the period of 1960-2010. There have been significant changes in the nature of the Pakistani economy over the last few decades. Therefore, I focus my detailed analysis on the last few decades where it seems more appropriate to investigate the nature and causes of business cycles in Pakistan. Furthermore, I evaluate the performance of a typical RBC and an augmented RBC model with an exogenous FDI shock in explaining cyclical fluctuations experienced by the Pakistani economy. I find that a simple RBC model does badly in terms of matching relevant second order moments of short run fluctuations as depicted by the data. However, augmented RBC model performs better compared to the simple RBC model. / Thesis (PhD) — Boston College, 2012. / Submitted to: Boston College. Graduate School of Arts and Sciences. / Discipline: Economics.

Debt and credit markets played a crucial role in recent economic history. This thesis is composed of three chapters, each of which explores some drivers of private and public debt accumulation throughout the past decade. The first two chapters are directly linked, and study some behavioural determinants of household debt accumulation in the United States in the run-up to the 2007-2008 financial crisis. The third chapter takes a different perspective, and focuses on the political economy of fiscal reforms. In the first chapter, I study whether the growth in US household debt ahead of the 2007-2008 financial crisis can be attributed to shifts in the distribution of personal income across the US population. The underlying theoretical mechanism is based on the idea that if individuals are concerned with status, rising income inequality within a given social group might lead its relatively poorer members to consume a larger proportion of their resources, due to a desire to emulate the consumption levels of richer individuals (Duesenberry [1949]; Frank, Levine and Dijk [2014]; Bertrand and Morse [2016]). I test this hypothesis by exploiting state-level variation in top incomes over time, following the methodology proposed by Bertrand and Morse [2016]. The results I present in this chapter challenge the status-emulation theory of consumer behaviour during the 2000s credit boom. I show that, between 1996 and 2007, only low and-middle-income home-owners increased their expenditure and debt-to-income ratios as a response to an increase in income inequality in their state of residence. I also show that the growth in income inequality was strongly correlated with house prices growth, across US states and metropolitan areas. The positive correlation between inequality and household debt in the pre-crisis US might therefore be simply explained by the wealth and collateral effects experienced by low and middle-income home-owners living in areas where inequality was growing at the fastest rates. The lifting of credit constraints due to rising house prices have been a major driver of household debt accumulation ahead of the 2007-2008 financial crisis (Mian and Sufi [2011]). However, this effect might have been coupled with a generalized optimistic belief that the growth in house prices was likely to continue in the future (Case, Shiller and Thompson [2012]). The second chapter therefore tests whether consumers hold realistic expectations about the housing market, and whether this is a driver of their consumption and saving decisions. Using the Michigan Survey of Consumers, I show that American households have heterogeneous expectations about the future of house prices, which systematically depend upon household characteristics, as well as upon the history of past house price realizations in the local area of residence. I also analyze individual-level forecast errors to show that house price expectations are biased and inefficient. Changes in individual forecast errors are predictable from past house price realizations in the local area of residence: in particular, forecast errors are positively correlated with recent price trends, and tend to become overoptimistic in good times, and over-pessimistic in bad ones. The predictability of forecast errors from public information available at the time the forecast was made suggests a violation of full-information rational expectations theory. This systematic bias in house price expectations matters because consumers make financial decisions on the basis of their house price beliefs. By exploiting an exogenous shift in housing sentiment, I show that when individuals expect the value of their properties to rise, they borrow against the anticipated increase in home equity. The third and final chapter shifts the focus to the political drivers of public debt and deficits. Public debt crises often call for the intervention of international financial institutions, such as the International Monetary Fund (IMF). In this chapter, I introduce a new panel dataset on planned fiscal policy prescriptions included in all IMF loans between 2002 and 2012, and use it to study how domestic politics of recipient countries influence the content of IMF lending agreements. I show that IMF policy prescriptions depend strongly on domestic politics and that fiscal conditions are shaped by a political force often neglected in public choice literature: the threat of extra-parliamentary opposition, or civil unrest. Extra-parliamentary opposition (measured as a populations’ propensity to riot and demonstrate) significantly reduces the stringency of fiscal policy conditions attached to IMF loans. It also reduces the number of reforms in the realms of public employment and labor markets. These results suggest that fiscal policy has a strong political component even during circumstances when domestic politics are commonly assumed to cease to matter, as they do in IMF agreements. Also, they suggest that voting is not the only mechanism through which politics enters the technical realm of economic policy.

This dissertation examines three topics in macroeconomics. The first chapter studies the impact of severance payments on employment when firms can subcontract as a substitute for hiring workers. In countries with strict job security regulations firms use flexible staffing arrangements to buffer the regular workforce from economic fluctuations and avoid workers' firing costs. I set up a general equilibrium model in the tradition of Hopenhayn and Rogerson (1993) where firms can hire two types of workers: subcontractors that are totally flexible, and permanent workers that entail firing costs that increase with seniority in the job. Both types are perfect substitutes in production, but permanent workers are relatively less expensive as subcontractors' charges are higher than the firm's own production costs. I estimate the model using a simulated method of moments by fitting employment growth dynamics of Chilean manufacturing plants. I find that allowing firms to subcontract workers increases output, employment and productivity. This effect is stronger on output as subcontracted workers allow firms to respond more aggressively to productivity shocks, which enhances the allocation of labor across firms and hence total factor productivity (TFP). When firms can subcontract, the negative effects of firing costs are less than previously estimated in the literature. The second chapter analyzes the effects of capital adjustment costs on quantity dynamics and asset prices in a real business cycle model when the representative agent has Epstein-Zin preferences. Capital adjustment costs make it costly for agents to smooth fluctuations in consumption through the production sector, inducing them to take more consumption risk. I show this model accounts for the main statistical features of macroeconomic aggregate quantities. At the same time, adjustment costs increase the equity risk premium, with the mean stock return and its standard deviation in the order of magnitude consistent with the data. The model also produces a stable risk-free rate, and comes close to matching its average return. Finally, the third chapter (with Shuheng Lin) empirically examines the contribution of firm-level idiosyncratic shocks to aggregate fluctuations in the US, Germany, Canada, and the UK. We find shocks to large firms are of little relevance in the UK or Canada, but roughly explain one third of output fluctuations in the US and Germany. We argue the ability of the largest firms to transmit shocks is not universal, even when the firm size distribution is highly skewed as the theory suggests (Gabaix, 2011).

Thesis (Ph.D.)--Massachusetts Institute of Technology, Alfred P. Sloan School of Management, 1982. / MICROFICHE COPY AVAILABLE IN ARCHIVES AND DEWEY. / Bibliography: leaves 227-234. / by Nathan Blair Forrester. / Ph.D.

This dissertation contains three essays on Macroeconomics and Finance. The first chapter has been motivated by the fact that recoveries from financial crises are characterized by low investment rates and declines in capital stocks. The paper constructs an equilibrium framework in which financial shocks have a persistent effect on aggregate investment. The key assumption is that physical capital is traded in a decentralized market with search frictions, generating ``capital unemployment.'' After a negative financial shock, the share of unemployed capital is high, and the economy dedicates more resources to absorbing existing unemployed capital into production, and less to accumulating new capital. An estimation of the model for the U.S. economy using Bayesian techniques shows that the model can generate the investment persistence and half of the output persistence observed in the Great Recession. Investment search frictions also lead to a different interpretation of the sources of business-cycle fluctuations, with a larger role for financial shocks, which account for 33 percent of output fluctuations. Extending the model to allow for heterogeneity in match productivity, the framework also provides a mechanism for procyclical capital reallocation, as observed in the data. The second and third chapters focus on labor unemployment during financial crises. The second chapter uses a sample of 116 recession episodes in developed and emerging market economies to compare the labor-market recovery during financial crises with that of other recession episodes. It documents two new stylized facts. First, labor-market recovery from financial crises is characterized by either higher unemployment (``jobless recovery'') or a lower real wage (``wageless recovery''). Second, inflation determines the type of recovery: low inflation (below 30 percent annual rate) is associated with jobless recovery, while high inflation is associated with wageless recovery. The paper shows that this pattern of labor recovery from financial crises is consistent with a simple model in which collateral requirements are higher (lower) when a larger share of labor costs (physical capital expenditure) is involved in a loan contract. The third chapter paper conducts a quantitative study of the optimal exchange-rate policy in a small open economy that faces the ``credit access-unemployment'' trade-off: In the presence of nominal wage rigidity, exchange-rate depreciation reduces unemployment; in the presence of collateral constraints linking external debt to the value of income, exchange-rate depreciation tightens the collateral constraint and leads to higher consumption adjustment. It is shown that the optimal policy during financial crises generally features large currency depreciation, since welfare costs related to higher unemployment and lower consumption typically outweigh welfare costs associated with intertemporal misallocation of consumption. The optimal policy also implies a lower currency depreciation than that necessary to achieve full employment, which is consistent with a managed-floating exchange-rate policy, frequently observed during financial crises in emerging market economies. Sudden stops (or large current-account adjustments) are part of the endogenous response to large negative shocks under the optimal exchange-rate policy.

The three chapters of my dissertation study the macroeconomics and firm dynamics under financial frictions and institutional frictions. They contain both theoretical and empirical analysis with a special emphasis on the scope of the open economy and the implications on policy. Chapter 1 presents a theoretical framework to study the debt portfolio choice and optimal capital control policy in an open economy with financial frictions. I extend the model of international borrowing with collateral constraint to allow for multiple debt maturities. As in the single-maturity version of the model, the equilibrium exhibits overborrowing because, due to a pecuniary externality, private agents undervalue the cost of financial liabilities that demand repayment in future constrained states. I show that in the multiple-maturity model overborrowing in short-term debt is especially severe because the repayment of short-term liabilities is larger than that of long-term liabilities in future constrained states, resulting in greater cost undervaluation of short-term financial obligations. To counteract these inefficiencies, the model justifies a set of maturity-dependent capital controls. The model predicts a tightening of capital controls tilted toward short maturities during financial crises. When calibrated to Argentine data, the model reproduces the observed dynamics of debt portfolios, and the short-term targeting of capital controls during crises. The optimal capital-control policy reduces the frequency of crises by half and generates sizable welfare improvements. Motivated by the policy implications of Chapter 1, the second chapter of my dissertation presents an empirical study of how capital control policies are implemented in financial crises. I construct a novel measure of capital control stringency and establish three stylized facts about the capital control changes around banking crisis. First, capital control policies do not show significant changes until the onset of financial crisis (procyclicality). Second, not only outflow controls but also inflow controls are strengthened upon the arrival of financial crisis (dual tightening). Third, inflow controls show strong emphasis towards curbing short-term flows, while outflow controls are generally enhanced with respect to a wide range of flows regardless of their maturities (short-term maturity targeting). These patterns are robust to countries with different economy stances, external indebtedness, exchange-rate regimes and capital control levels. Besides the financial frictions, the institutional frictions also play important roles in the external finance. Therefore, the third chapter of my dissertation examines the role of public governance quality in determining the composition of a country's external liabilities and the capital structure of firms. In this joint work with Shang-Jin Wei, we first build a model with firm heterogeneity to show that better institutional quality tends to promote a higher share of foreign direct investment and equity investment in total foreign liabilities, and a higher share of long-term debt within the debt/loan category. Similar prediction holds for the capital structure of firms. We then conduct extensive empirical investigation by exploring both firm-level data and country-level data and find supportive evidence for these predictions.

The three chapters of my dissertation study factors that contribute to the uneven distribution of economic activities across space. In the first chapter, I study why firms are more productive in larger cities, by focusing on a potential explanation first proposed by Adam Smith: Larger cities facilitate greater division of labor within firms. Using a dataset of Brazilian firms, I first document that division of labor is indeed robustly correlated with city size, controlling for firm size. I propose a theoretical model in which this relationship is generated by both a selection effect---firms endogenously sort across space, choosing different extents of division of labor---and a treatment effect---larger cities increase division of labor for all firms, by reducing the costs associated with greater division of labor. The model embeds a theory of firms' choice of the optimal division of labor in a spatial equilibrium model. Structural estimates derived from the model show that division of labor accounts for 16\% of the productivity advantage of larger cities in Brazil, half of which is due to firm sorting and the other half to the treatment effect of city size. The theory also generates a set of auxiliary predictions of firms' responses to a reduction in the cost of division of labor. Exploiting a quasi-experiment that changes the cost of division of labor within cities---the gradual roll-out of broadband internet infrastructure---I find causal empirical support for these predictions, validating the model. Finally, the quasi-experiment also provides out-of-sample validation for the structural estimation. The estimated model predicts changes in the average division of labor within different cities in response to the new broadband internet infrastructure, which I find are similar to the actual changes. The second chapter, co-authored with Ariel Burstein, Gordon Hanson and Jonathan Vogel, studies how occupation (or industry) tradability shapes local labor-market adjustment to immigration. Theoretically, we derive a simple condition under which the arrival of foreign-born labor into a region crowds native-born workers out of (or into) immigrant-intensive jobs, thus lowering (or raising) relative wages in these occupations, and explain why this process differs within tradable versus within nontradable activities. Using data for U.S. commuting zones over the period 1980 to 2012, we find that consistent with our theory a local influx of immigrants crowds out employment of native-born workers in more relative to less immigrant-intensive nontradable jobs, but has no such effect within tradable occupations. Further analysis of occupation labor payments is consistent with adjustment to immigration within tradables occurring more through changes in output (versus changes in prices) when compared to adjustment within nontradables, thus confirming our model's theoretical mechanism. We then use an extended quantitative model to interpret the magnitudes of our reduced-form estimates and to aggregate up the consequences of counterfactual changes in U.S. immigration from the region-occupation level to the region-level. The third chapter proposes a new channel through which improvements in transportation or communications technologies affect skill distribution across space. In this joint work with Yang Jiao, we start with the empirical observations that substantial skill and occupation relocation took place across U.S. cities during past decades. In particular, big cities attract more skilled workers and become more specialized in cognitive-intensive occupations. Motivated by empirical literature on the association between modern communications technology adoption and production fragmentation, we develop a spatial equilibrium model with domestic production fragmentation to analyze the impact of a reduction in the costs of cross-city production teams---e.g., communications cost---on spatial distribution of skills and economic activities. The model generates predictions consistent with the observed empirical patterns, including more spatial segregation of skilled and unskilled workers, and occupation specialization across U.S. cities over time. In contrast to findings in the international offshoring literature, in which there are winners and losers, we find that under regularities conditions, there are Pareto welfare gains for all agents with heterogeneous skills, together with a substantial measured labor productivity increase at the aggregate level.

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Orientador: Mario Augusto Bertella / Banca: Alexandre Sartoris Neto / Banca: Roseli da Silva / Resumo: A modelagem macroeconômica tem estado sob intenso escrutínio desde a Crise Financeira de 2007-2008, quando graves deficiências foram expostas na metodologia DSGE. Embora muitas dessas críticas tenham sido injustas ou desinformadas, elas enfatizaram a necessidade de considerar formas alternativas de modelagem macroeconômica e aprimorar abordagens estabelecidas, a fim de torná-las mais úteis para a compreensão de um mundo em recessão. Nesse sentido, argumentamos que explorar a diversidade na modelagem macroeconômica pode beneficiar a profissão e produzir resultados importantes em relação à formulação de políticas macroeconômicas. Uma maneira de explorar a diversidade na macroeconomia é investigar sistematicamente tanto os modelos DSGE quanto os modelos baseados em agentes, revelando suas forças e limitações relativas, e combinando essas duas abordagens diferentes, a fim de que possamos aprender uma com a outra e talvez produzir um modelo híbrido. Este trabalho dá o primeiro passo rumo a esse desafio. Acreditamos que uma abordagem interdisciplinar pode ajudar não só toda a agenda da pesquisa macroeconômica, mas também beneficiar a sociedade como um todo, permitindo a implementação de medidas políticas mais eficazes e aumentando a capacidade dos economistas em modelar a heterogeneidade social em um mundo complexo e em constante evolução. / Abstract: Macroeconomic modelling has been under intense scrutiny since the Financial Crisis of 2007-2008, when serious shortcomings were exposed in the DSGE methodology. Although many of these criticisms were unfair or uninformed, they did highlight the need of considering alternative forms of macroeconomic modelling and enhancing established approaches in order to make them more useful for understanding a world in recession. In this sense, we argue that exploiting diversity in macroeconomic modelling can benefit the profession and yield more fruitful developments regarding the formulation of macroeconomic policy. One way of exploring diversity in macroeconomics is by investigating systematically both the DSGE and the Agent-Based models, revealing their relative strengths and limitations, and combining these two different approaches, so that we can explore what one can learn from the other and perhaps yield a hybrid model. This work takes the first step towards this ultimate achievement. We believe that an interdisciplinary approach may help not only the entire macroeconomic research agenda, but also benefit society as a whole, allowing the implementation of more effective policy measures and by increasing the ability of economists to model social heterogeneity in a complex-evolving world. / Mestre