Essays on liquidity management and aggregate fluctuations

Abstract

This dissertation consists of two essays that focus on the role that frictions to inter-temporal exchange have in shaping the response of aggregate activity to exogenous changes in credit conditions. The first essay approaches this issue from a general equilibrium perspective. I study credit crises by considering the fact that they do not always affect all agents in the same manner. I show that during a household credit crisis, the more the productive sector saves, the more disruptive the contraction in household debt is. That is, the response of the economy is closely connected to the financial asset position of the productive sector, a statistic that can be calculated directly from aggregate data. An important feature of the model is that it is household debt, as opposed to household savings, which has a productive role. The low interest rates that ensue the contraction in household debt not only make investment cheaper, but also alter its composition. Consequently, capital ends being used in a less efficient manner, and the overall effect in economic activity is ultimately a quantitative issue. I solve the model numerically and perform a numerical evaluation of this novel channel. The second essay, co-authored with Maria Elisa Belfiori, provides a decision theoretical model of loan commitments, with the purpose of exploiting aggregate data on loan commitments to identify credit crunches. The usual difficulty for identification is that interest rate movements can be misleading due to the nature of credit markets. For instance, during a credit crunch, interest rates could go down just because funds \textit{flight to quality}, or because lending contracts are indexed to policy interest rates. We sidestep this problem by exploiting data on used of unused balances of loan commitments contracts. Commercial and Industrial Loans in the U.S. are predominantly implemented using these contracts. We study the evolution of the used and unused portions during the last recession to shed light on the origin of this episode. We find that the type of movements observed in aggregate data regarding aggregate quantities can indeed be consistent with real shocks.