Browsing by Subject "Sudden stops"

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    Essays in macroeconomics and finance.
    (2009-12) Piazza, Roberto
    This thesis proposes two studies that highlight the relevance of financial markets imperfections for aggregate macroeconomic fluctuations and growth. In Part I, I show that financial innovation has increased diversification opportunities and lowered investment costs, but has not reduced the relative cost of active (informed) investment strategies relative to passive (less uninformed) strategies. What are the consequences of this phenomenon? I study an economy with linear production technologies, some more risky than others. Investors can use low quality public information or collect high quality, but costly, private information. Information helps avoiding excessively risky investments. Financial innovation lowers the incentives for private information collection and deteriorates public information: the economy invests more often in excessively risky technologies. This changes the business cycle properties and can reduce welfare by increasing the likelihood of ``liquidation crises". In Part II, I start from the observation that in emerging economies periods of rapid growth and large capital inflows can be followed by sudden stops and financial crises. The chapter, abstracting from business cycles aspects, shows that the process of long run growth can be a key element in accounting for these facts. I study a growth model for a small open economy where decreasing marginal returns to capital appear only after the country has reached a threshold level of development, which is uncertain. Limited enforceability of contracts allows default on international debt. International investors can optimally choose to stop lending when the appearance of decreasing marginal returns slows down the growth of the economy, which then defaults and enters a financial crisis.
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    Essays on financial frictions and macroeconomics.
    (2012-07) Hur, Sewon
    This dissertation consists of three essays. The first essay analyzes the effects of the Great Recession on different generations. While older generations have suffered the largest decline in wealth due to the collapse in asset prices, younger generations have suffered the largest decline in labor income. Potentially, the young may benefit from the purchase of cheaper assets, especially if they have access to credit. To analyze the impact of these channels, I construct an overlapping generations model with borrowing constraints in which households choose a portfolio over housing as well as risk-free and risky financial assets. Shocks to labor efficiency and uncertainty regarding the return on risky assets generate a recession with a drop in asset prices and cross-sectional changes in consumption, investment, and wealth that are consistent with the recent recession. In particular, younger generations experience large declines in nondurable consumption and housing investment, a fact that is supported by the data. Overall, the young suffer the largest welfare losses, equivalent to a 5 percent reduction in lifetime consumption. In the second essay, Illenin Kondo and I study the foreign reserves accumulation of emerging economies. Emerging economies, unlike advanced economies, have accumulated large foreign reserve holdings. We argue that this policy is an optimal response to an increase in foreign debt rollover risk. In our model, reserves play a crucial role in reducing debt rollover crises ("sudden stops"), akin to the role of bank reserves in preventing bank runs. An unexpected increase in rollover risk leads to a global rise in sudden stops, prompting emerging economies to update their priors about the risk they face. We show that a global increase in the rollover risk faced by emerging economies explains the outburst of sudden stops in the late 1990s, the subsequent increase in foreign reserves holdings, and the salient resilience of these countries to sudden stops ever since. In the third essay, Jose Asturias and I examine the role of entry barriers on firm entry and exit, aggregate productivity and output. Using cross-country data, we document that gross domestic product (GDP) per capita is positively correlated with firm entry rates, and that firm entry rates are positively correlated with barriers to firm entry. We develop a model, based on Asturias, Hur, Kehoe, and Ruhl (2012) where aggregate productivity growth is driven by the endogenous entry of productive firms and the endogenous exit of unproductive firms. Differences in entry policy lead to different levels of entry and output, while all economies grow at a balanced growth path with identical growth rates. In the quantitative extension, we show that reforms to entry costs can generate transition paths that resemble that of high-growth emerging economies.