Essays on macroeconomics and finance

Abstract

This dissertation consists of two parts. The unifying scheme is to advance our understanding of the nature of financial markets, in particular their macroeconomic implications. In the first essay, I focus on the microstructure of the financial market. In particular, I study how investors' information choices interact over time, and how does this dynamic aspect change the nature of information acquisition in financial markets? In an infinite-horizon framework in which a stock's dividend has a persistent component (stock fundamental), and overlapping generations of investors choose whether to acquire costly information about this time-varying component, I illustrate that information is like bubble in that its value is forward-looking: current investors have more incentives to acquire information if more investors get informed in the future, as the future resale stock price becomes more sensitive to the fundamental. This dynamic complementarity in information acquisition leads to multiple stationary rational-expectation equilibria, despite presence of the classic static substitutability force as in Grossman and Stiglitz (1980). The dynamic complementarity in information acquisition can be most prominent with intermediate persistence of stock fundamental, or when the public signal is imprecise. The second essay develops and quantifies a financial theory to account for the macroeconomic phenomenon that the recovery from the Great Recession was much slower than recoveries from other postwar recessions . I propose a standard neoclassical model enriched with a land sector. Land can be used either as a consumption good for the household or as collateral for the firm to finance working capital. The model exhibits two locally stable steady states: one with high capital and high land price, and the other with low capital and low land price. The multiplicity of steady states allows for asymmetric responses to small and large shocks. Large adverse shocks have a much more persistent impact, as they trigger transitions from one steady state to the other. A calibrated version of the model displays significantly delayed recovery upon large adverse shocks and is consistent with various features of the Great Recession and its aftermath.