Essays in Macroeconomics

Abstract

This dissertation consists of two essays. In the first essay, Enoch Hill and I develop a dynamic general equilibrium model in which an increase in the importance of firm-specific human capital is able to account for two key changes in business cycle patterns in the U.S. since mid-1980s: jobless recoveries and the reversal in the cyclicality of labor productivity. Additionally, we present empirical support that the importance of firm-specific human capital has indeed increased in importance for recent recessions. In the second essay, Zhifeng Cai and I develop a macroeconomic model of financial frictions in order to account for the investment and cash holding behavior of self-financing corporations during the Great Recession. Unlike standard models of financial frictions which impose collateral or borrowing constraints on firms, the financial frictions in our model work through the liquidity channel. In our model, corporate investment is subject to liquidity shocks. Bank credit line and liquid assets are substitutes for financing liquidity shocks. In our model, a tightening of the bank credit line forces firms to hold more liquid assets, increasing the effective cost of capital expenditure hence reducing corporate investment.