Browsing by Subject "Financial development"
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Item Essays in international macroeconomics(2013-08) Steinberg, Joseph BowlinThis thesis is composed of two separate essays. In the first essay, I study the hypothesis that real exchange rate undervaluation can alleviate the economic symptoms of financial underdevelopment, acting as a temporary substitute for institutional reform. This hypothesis is motivated by recent empirical studies that document a link between real exchange rate undervaluation and increased growth in GDP per capita in developing countries. As further motivation I present new evidence that this effect is driven by an interaction between undervaluation and financial frictions. Using panel data on value added in manufacturing sectors at the 3-digit ISIC level for 103 countries, I find that for countries with low levels of financial development, real exchange rate undervaluation is associated with stronger growth in sectors that depend more heavily on external financing. To establish a causal relationship between undervaluation, financial development and growth and evaluate its quantitative implications I build a multi-sector semi-small open economy model with limited enforcement of financial contracts. Qualitative partial equilibrium results indicate that a government policy of subsidizing the purchase of tradeable goods undervalues the real exchange rate and loosens enforcement constraints, leading to temporary increased growth on the transition to a new steady state with higher output. The magnitude of this effect is increasing in the severity of the enforcement problem. For economies with severe enforcement problems this policy increases consumption although the quantitative effect is quite small. Misallocation of resources can cause large reductions in total factor productivity (TFP). The literature emphasizes financial frictions driven by limited contract enforcement that restrict productive firms' access to credit. Evidence suggests that information frictions also reduce access to credit, particularly in countries with weak contract enforcement. In the second essay, I study how the interaction between information frictions and limited enforcement affects resource allocation and TFP. I build a model in which lenders have imperfect information about borrowers' default risk and enforcing repayment is costly. I use the model to illustrate i) how imperfect information of this type causes misallocation, and ii) how limited enforcement exacerbates this effect. I calibrate the model and find that imperfect information causes TFP to fall by up to 23% when I take contract enforcement parameter values from U.S. data, and by up to 32% when I set them to values common in low-income countries.Item Essays in macroeconomics(2014-06) Lopez Martin, BernabeIn the first essay I develop a quantitative framework of firm dynamics where the size of the informal sector is determined by financial constraints and government taxation. Informal sector firms do not pay taxes but have no access to external finance. For taxes and financial constraints parameterized for a country like Egypt, I find losses in total factor productivity of over 28% and in output per worker of 60% relative to the US benchmark. The effects of the elimination of formal sector registration costs are small. Improving the access to credit for formal sector firms increases wages, aggregate TFP and output per worker while reducing the size of the informal sector.In my second essay I study the consequences of low financial development in an environment where firms can invest to increase productivity. Lower financial development increases the dispersion of the marginal productivity of capital across firms lowering aggregate production efficiency. However, models of firm dynamics with financial constraints generate modest losses due to misallocation relative to those found in the empirical literature. I construct a quantitative model of firm dynamics with endogenous accumulation of firm productivity where financial constraints diminish the incentives of firms to invest in productivity, reducing firm productivity growth. This channel amplifies the losses from misallocation. The model can partially account for the lower life-cycle productivity growth of firms in economies with underdeveloped financial markets. In the last essay of this thesis, Naoki Takayama and I study the consequences of recessions for young individuals and the impact of government taxation. Recessions generate increases in youth unemployment and significant losses in the expected value of labor earnings. We build a life cycle model with on-the-job human capital accumulation, aggregate and idiosyncratic productivity shocks and heterogeneous workers. We find that in countries where the tax-wedge is higher, unemployment rates are amplified. We compute the long-term earnings losses of individuals that lose their job in different states of the economy and find that losses are bigger: in worse aggregate states of the economy, for younger individuals, in economies with a higher tax wedge, for ex-ante lower ability individuals.