Thesis advisor: Fabio Ghironi / This dissertation examines the macroeconomic dynamics under different international asset market structures. The dissertation consists of two chapters. The first chapter is my cowork with Taesu Kang, a classmate of mine at Boston College, department of economics. We investigate the dynamics of the U.S and emerging Asian countries during the financial crisis in 2008. We focus on the bank lending channel as the source of shock transmission and explain how the internal default in the U.S can be transmitted to emerging Asian countries. The second chapter of my thesis is my work on the international equity home bias and Backus Smith puzzles. I propose a model with a incomplete asset market, endogenous labor supply and non-tradable goods that can generate a high degree of home equity bias, even when the domestic human capital return and equity return are highly correlated. My model also generates a very low correlation between the consumption differential across countries and the real exchange rate. The correlation is more inline with data than the strongly positive correlation predicted by a standard complete asset market framework. / Thesis (PhD) — Boston College, 2013. / Submitted to: Boston College. Graduate School of Arts and Sciences. / Discipline: Economics.

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Thesis advisor: Susanto Basu / This dissertation consists of three essays that study macroeconomic modeling and its application with a particular focus on monetary economics. In Chapter 1, I develop a New Keynesian model with heterogeneous workers whose wage settings are subject to downward nominal wage rigidity (DNWR) to address two puzzles of inflation dynamics: the missing deflation during the Great Recession and the excessive disinflation afterward. I demonstrate that DNWR introduces a time-varying wedge between the output gap and the marginal cost of producing one unit of output, which makes the observed Phillips curve flatter during recessions. Endogenous evolution of cross-sectional wage distribution generates various dimensions of non-linearities, while the presence of the zero lower bound (ZLB) of the nominal interest rate further reinforces the mechanism. Consequently, the model can quantitatively account for the inflation dynamics during and after the Great Recession under plausible parameter values that are consistent with micro evidence. In Chapter 2, I study welfare-maximizing monetary policy rule in the heterogeneous agent New Keynesian model with DNWR that is developed in Chapter 1. The optimal monetary policy rule responds strongly to output to address the inefficiency generated by DNWR, while responsiveness to inflation plays a minor role in welfare. Moreover, monetary policy can improve social welfare by responding more aggressively to a contractionary shock than to an expansionary one to offset the asymmetry stemming from DNWR. In the presence of the ZLB, on the other hand, alternative policy rules such as forward guidance and price-level targeting can partly offset the adverse effects of it by committing to a future low interest rate policy. I also investigate the optimal steady-state inflation rate. In Chapter 3, which is coauthored with Dongho Song and Jenny Tang, we propose a method of introducing theory-driven priors into the estimation of the vector autoregression (VAR). Our methodology is more flexible than existing methods in that it allows a researcher to incorporate prior beliefs on a subset of variables in theoretical models that are of key interest while remaining agnostic about other variables in the VAR. We apply to the problem of exchange rate forecasting for the British pound versus the US dollar. By imposing different combinations of priors informed by uncovered interest rate or purchasing power parity, we find that substantial gains are realized at longer forecast horizons. / Thesis (PhD) — Boston College, 2018. / Submitted to: Boston College. Graduate School of Arts and Sciences. / Discipline: Economics.

How important are financing constraints in explaining the cyclical behaviour of investment. How do they affect the investment responses to macroeconomic shocks. This thesis answers these questions by developing a structural model of investment with financing and irreversibility constraints and by analysing its implications both theoretically and empirically. After briefly reviewing the recent advancements of the investment literature in chapter 1, in chapter 2 we present a preliminary empirical analysis of the links between financial structure and firm dynamics. In chapter 3 we develop a basic structural model which analyses optimal investment and saving choices of entrepreneurs in the presence of uncertainty as well as of financing constraints. We show that future expected financing constraints generate a precautionary saving behaviour which affects the optimal allocation between risky investment and saving. In chapter 4 we extend the basic model to include both fixed and variable capital as well as financing constraints and irreversibility of fixed capital. We show that the interactions between financing and irreversibility constraints amplify the effects of financing constraints on the cyclical fluctuations of investment and production. This interaction together with the precautionary saving behaviour is essential in explaining a number of stylised facts about investment dynamics: i) aggregate inventory investment is very volatile and procyclical, especially in recessions; ii) it leads the business cycle, while fixed capital investment lags it; iii) fixed and especially inventory investment are sensitive to net worth; iv) output and inventories are more volatile and procyclical for small firms than for large ones. In chapter 5 we verify empirically the theoretical results derived in chapter 4. We use our panel of balance sheet data on Italian manufacturing firms to test and not reject the financing constraints hypothesis. This hypothesis is also strongly supported by the direct qualitative information about the problems faced by the entrepreneurs in financing new investment projects.

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