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Essays on Financial and Labor Markets with Frictions

Essays on Financial and Labor Markets with Frictions
Author: Feng Dong (Economist)
Publisher:
Total Pages: 160
Release: 2014
Genre: Electronic dissertations
ISBN:
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The dissertation, which consists of three chapters, is devoted to exploring financial and labor markets with frictions. Chapter I: Unemployment and Capital Misallocation. The recent recession was associated not only with a marked disruption in the credit market, but also a sharp deterioration in labor market conditions, as evidenced by high unemployment rates and an outward shift in the Beveridge curve. Motivated by such co-movements of the credit market and the labor market, in this chapter I develop a tractable dynamic model with heterogeneous entrepreneurs, credit constraints, and labor-search frictions. In this framework, the misallocation of capital across firms has an adverse effect on the matching efficiency in the labor market. I then quantify the importance of capital misallocation for understanding the behavior of unemployment rate. I find that the credit crunch was the key driving force behind the outward shift in the Beveridge curve during and after the Great Recession. More broadly, I find that credit market frictions and labor search frictions almost equally contributed to unemployment over all business cycles between 1951 and 2011. Chapter II: Asset Exchange with Search Frictions and Costly Information Acquisition. The second chapter presents a model to characterize conditions under which centralized and decentralized markets (CM/DM) co-exist for asset trading. The asset payoff and trading motive are the seller's private information. CM is immune to search frictions, but suffers from adverse selection. In contrast, DM is subject to search frictions, but it is sustainable since buyers acquire costly information on the asset payoff, and offer a trading menu different from that posted by uninformed buyers. As matching efficiency in the DM increases and the information cost decreases, more trade migrates from CM with adverse selection to DM with search frictions. In the limit, DM with search frictions converges to CM with complete information. I use the model to address the heterogeneous welfare effect of a government asset purchase programs like the Troubled Asset Relief Program (TARP). Chapter III: A Search-Based Theory of The Life-Cycle Pattern of Asset Holding. The third chapter investigates the implications of search frictions for a household's life cycle pattern of asset trading as well as for its size distribution in the OTC. General types of preferences are considered and the usual search-theoretic restriction of indivisibility on asset holding is removed. I employ the birth-and-death process to analytically characterize the non-stationary life-cycle pattern of asset holding by each cohort. In the presence of search frictions in the OTC, our paper predicts that the life cycle of asset holding by each cohort conforms to a geometric distribution while the size distribution of asset holding in each cross-section follows a logarithmic pattern. In the end, our model yields Gibrat's law for asset trading in the OTC.

Essays on Search Frictions in Financial Markets

Essays on Search Frictions in Financial Markets
Author: Semih Uslu
Publisher:
Total Pages: 186
Release: 2016
Genre:
ISBN:
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This dissertation consists of three chapters about search frictions in financial markets. Chapter 1: "Pricing and Liquidity in Decentralized Asset Markets" I develop a search-and-bargaining model of liquidity provision in over-the-counter markets where investors differ in their search intensities. A distinguishing characteristic of my model is its tractability: it allows for heterogeneity, unrestricted asset positions, and fully decentralized trade. I find that investors with higher search intensities (i.e., fast investors) are less averse to holding inventories and more attracted to cash earnings, which makes the model corroborate a number of stylized facts that do not emerge from existing models: (i) fast investors provide intermediation by charging a speed premium, and (ii) fast investors hold larger and more volatile inventories. I also calibrate the model, demonstrate that it produces realistic quantitative outcomes, and use it to study the effect of trading frictions on the supply and price of liquidity. The results have policy implications concerning the Volcker rule. Chapter 2: "Price Dispersion and Trading Activity during Turbulent Times" I construct a dynamic model of crises in a decentralized asset market that operates via search and bargaining. The crisis is modeled as a one-time aggregate shock to uncertainty with a random recovery. The arrival of the crisis shock leads to an increase in both the volatility of asset payoff and the volatility of investors' background risk. The equilibrium path for investors' valuations, terms of trade, and the distribution of investors' positions is characterized in closed form both during the crisis and during the recovery. Tractability of the model allows me to derive natural proxies for price dispersion and trading activity. I show that both volatility of asset payoff and volatility of background risk contribute to higher level of price dispersion during the crisis. Trading activity might be higher or lower depending on the increase in the volatility of background risk relative to the increase in the volatility of asset payoff, consistent with the "flight-to-quality" observations during extreme episodes. A flight to the asset market always starts with a "heating-up" in trading activity but a flight from the market might start with a dry-up or heating-up during the onset of the crisis. If the relative increase in the volatility of asset payoff is too high, a period of fire sales is triggered leading to a short heating-up before the complete dry-up of the trading activity. I calibrate the model according to the U.S. corporate bond market data and show that it captures the observations during the subprime crisis. Chapter 3: "Endogenous Liquidity and Cross-section of Returns in Dynamic Bargaining Markets" The empirical analysis of liquid/illiquid asset pairs reveals the existence of a return differential (liquidity premium) between those types of assets. The time variation in liquidity premia is delineated by the term "flight-to-liquidity," meaning that liquidity premia are higher during extreme market episodes. In this paper, I extend the search-and-bargaining model of Weill (2008) by allowing for risk aversion, to explain this observation. Risk-averse investors optimally allocate their limited budgets of search efforts to various assets. This extension allows me to examine the relationship between risk and liquidity of assets in the cross-section and over time. My model generates endogenous cross-sectional liquidity differentials corroborating much of the empirical evidence. Furthermore, I show that when asset payoffs are more volatile, trade surpluses are higher because idiosyncratic hedging quality differentials are wider. Higher trade surpluses lead to higher value of search, and in turn, higher opportunity cost of committing to a particular asset, especially to an illiquid one. Therefore, periods of high volatility are associated with a flight-to-liquidity.

Essays on Markets with Frictions

Essays on Markets with Frictions
Author: Christoph Ungerer
Publisher:
Total Pages:
Release: 2012
Genre:
ISBN:
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The classical treatment of market transactions in economics presumes that buyers and sellers engage in transactions instantly and at no cost. In a series of applications in the housing market, the labour market and the market for corporate bonds, this thesis shows that relaxing this assumption has important implications for Macroeconomics and Finance. The first chapter combines theory and empirical evidence to show that search frictions in the housing market imply a housing liquidity channel of monetary policy transmission. Expansionary monetary policy attracts buyers to the housing market, raising housing liquidity. Higher housing sale rates in turn allow lenders to threaten foreclosure more effectively, because the expected carrying costs on foreclosure inventory are lower. Ex-ante, this makes banks willing to offer larger loans, stimulating aggregate demand. The second chapter uses a heterogeneous firm industry model to explore how the macroeconomic response to a temporary employer payroll tax cut depends on the hiring and firing costs faced by firms. Controversially, the presence of non-convex labour adjustment costs suggests that tax cuts create fewer jobs in recessions. When firms hoard labour during downturns, they do not respond to marginal tax cuts by hiring additional workers. The third chapter develops a theory in which trader career concerns generate an endogenous transaction friction. Traders are reluctant to sell assets below historical purchase price, since realizing a loss signals to the employer that the trader is incompetent. The chapter documents empirically several properties of corporate bond transaction data consistent with this theory of career-concerned traders.

Three Essays on Labor Market Frictions Under Firm Entry and Financial Business Cycles

Three Essays on Labor Market Frictions Under Firm Entry and Financial Business Cycles
Author: Jeremy Rastouil
Publisher:
Total Pages: 0
Release: 2019
Genre:
ISBN:
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During the Great Recession, the interactions between housing, labor and entry highlight the existence of narrow propagation channels between these markets. The aim of this thesis is to shed a light on labor market interactions with firm entry and financial business cycles, by building on the recent theoretical and empirical of DSGE models. In the first chapter, we have found evidence of the key role of the net entry as an amplifying mechanism for employment dynamics. Introducing search and matching frictions, we have studied from a new perspective the cyclicality of the mark-up compared to previous researches that use Walrasian labor market. We found a less countercyclical markup due to the acyclical aspect of the marginal cost in the DMP framework and a reduced role according to firm's entry in the cyclicality of the markup. In the second chapter, we have linked the borrowing capacity of households to their employment situation on the labor market. With this new microfoundation of the collateral constraint, new matches on the labor market translate into more mortgages, while separation induces an exclusion from financial markets for jobseekers. As a result, the LTV becomes endogenous by responding procyclically to employment fluctuations. We have shown that this device is empirically relevant and solves the anomalies of the standard collateral constraint. In the last chapter, we extend the analysis developed in the previous one by integrating collateral constrained firms in order to have a more complete financial business cycle. The first result is that an entrepreneur collateral constraint integrating capital, real commercial estate and wage bill in advance is empirically relevant compared to the collateral literature associated to the labor market which does not consider these three assets. The second finding is the role of the housing price and credit squeezes in the rise of the unemployment rate during the Great Recession. The last two chapters have important implications for economic policy. A structural deregulation reform in the labor market induces a significant rise in the debt level for households and housing price, combined with a substantial rise of firm debt. Our approach allows us to reveal that a macroprudential policy aiming to tighten the LTV ratio for household borrowers has positive effects in the long run for output and employment, while tightening LTV ratios for entrepreneurs leads to the opposite effect.

Essays on Macroeconomics and Finance with Search Frictions and Inequality

Essays on Macroeconomics and Finance with Search Frictions and Inequality
Author: Gaston Chaumont
Publisher:
Total Pages:
Release: 2019
Genre:
ISBN:
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This dissertation consists of two chapters. The first chapter, written jointly with Shouyong Shi, studies a directed search equilibrium with risk-averse workers who can search on the job and accumulate non-contingent assets at an exogenous rate of return and under a borrowing limit. Search outcomes affect earnings and wealth accumulation. In turn, wealth and earnings affect search decisions by changing the optimal tradeoff between the wage and the matching probability. The calibrated model yields sizable inequality in wages and wealth among homogeneous workers. Wealth significantly reduces a worker's transition rates from unemployment to employment and from one job to another. The interaction between search and wealth provides important self-insurance as it reduces the pass-through of earnings inequality into consumption by more than 60%, relative to the model without wealth accumulation. We also study the dynamic welfare effects of changes in the unemployment insurance (UI) benefit. Keeping UI's duration fixed, we find that welfare is maximized with a replacement rate of about 20% instead of the baseline 50%, together with lower taxes on wages to finance the lower expenditures on UI.The second chapter studies the interactions between default risk and the liquidity of the secondary market for sovereign bonds. The secondary market for sovereign bonds is illiquid and the liquidity is endogenous. Such endogenous liquidity has important effects on the credit spread and the probability of default. To study equilibrium implications of such liquidity, I integrate directed search in the secondary market into a macro model of sovereign default. The model generates liquidity endogenously because investors in the secondary market face a trade-off between the transaction costs and the trading probability. This trade-off varies with the aggregate state of the economy, creating a time-varying liquidity premium over the business cycle. I show that trade flows in the secondary market significantly affect the price of sovereign bonds and amplify the effect of default risk on credit spreads. The importance of liquidity in the secondary market increases when the economic conditions of the issuing country worsen. Illiquidity increases with default risk and accounts for a sizable fraction of credit spreads, ranging from 10% to 50%.

Essays on Liquidity, Monopolistic Competition, and Search Frictions

Essays on Liquidity, Monopolistic Competition, and Search Frictions
Author: Mario Rafael Silva
Publisher:
Total Pages: 200
Release: 2017
Genre:
ISBN: 9780355307344
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I study the interactions between liquidity constraints, monopolistic competition, and search frictions for product markets, labor markets, and credit markets. Monopolistic competition is especially important for three different reasons. First, there is an externality that links the demand of firms to the state of the economy. Second, under free entry, the product space is influenced by policy and interacts with liquidity constraints. Third, monopolistic competition generates markups, which can augment other wedges and thereby interact with liquidity constraints.The first chapter considers the role played by endogenous variety and monopolistic competition in the long-run transmission of monetary policy. The combination of free entry and product variety gives rise to both an intensive margin (quantity of particular good) and extensive margin (extent of variety), and search frictions imply that firm entry involves a congestion externality. Inflation generally reduces variety. Under constant-elasticity-of-substitution (CES) preferences, firms are inefficiently small, with the inefficiency increasing in product differentiation and the extent of search frictions. The Friedman rule, which involves contracting the money supply at the rate of time preference, is the best policy under CES preferences. In contrast, with variable elasticity of demand, inflation can increase firm size, reduce markups, and raise welfare, even though output is lower. Under CES preferences, the welfare cost of inflation is high; moreover, it increases monotonically with the markup and is higher with endogenous variety than with a fixed variety alternative.The second chapter departs from the dramatic growth of revolving credit since 1970 relative to both consumption and consumer credit. Importantly, revolving credit primarily determines short-run household liquidity and comoves positively with product variety. I augment the Mortensen-Pissarides model with an endogenous borrowing constraints and free entry of monopolistically competitive firms. Unemployment is amplified from a two-way feedback: higher debt limits encourage firm entry and raise product variety (the entry channel), and greater variety makes default more costly and thereby raises the equilibrium debt level (the consumption value channel). I compare the model to a counterfactual economy in which either channel is shut down and find that mean amplification exceeds 50%. Furthermore, only the model economy generates a procyclical response of the credit-to-consumption ratio, as observed in the data.The third chapter examines the role of corporate finance and imperfect competition in the pass through of monetary policy to the real lending rate and its transmission into investment. Monopolistically competitive entrepreneurs can finance investment opportunities using bank-issued credit or money. They seek loans in an over-the-counter market where the terms of the contract (loan size, interest rate, and down payment) are negotiated subject to pledgeability constraints. I investigate pass through of the policy rate to the real lending rate and its transmission to output and investment, taking into account the interplay of (1) heterogeneous financial frictions from limited enforcement and (2) aggregate demand externalities from monopolistic competition. Whereas returns to scale or product diversity are not important for the pass through, the former substantially affect the transmission of policy to investment and output. Furthermore, financial frictions interact positively with demand complementarities from monopolistic competition. Greater dispersion of financial frictions reduces investment and output and also increases transmission unevenly across the range of nominal policy rates, having a maximal effect at about a policy rate of 9%.

Essays on Macroeconomics with Financial Frictions

Essays on Macroeconomics with Financial Frictions
Author: Wei Wang
Publisher:
Total Pages: 206
Release: 2015
Genre: Electronic dissertations
ISBN:
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This dissertation develops three independent yet related frameworks to identify economic mechanisms through which financial frictions affect the aggregate economy over the business cycle and along the path of economic development. There are three chapters in this dissertation. In each chapter, a theoretical model is constructed based on motivating empirical facts, followed by quantitative analyses disciplined and evaluated by data at both the macro- and micro-level. Chapter 1, Financial Frictions and Agricultural Productivity Differences, explores the role of financial frictions in accounting for agricultural employment share and labor productivity differences across provinces in China. A two-sector general equilibrium model with a subsistence consumption requirement and financial frictions is constructed. Limited credit decreases the use of intermediate inputs and increases the use of labor input. As a consequence, workers are trapped in the agricultural sector and agricultural labor productivity is low. Since agricultural employment consists of a large percentage of total employment, aggregate labor productivity is also low. Quantitatively, financial frictions alone explain more than 25% of the observed employment share and productivity differences. Financial frictions amplify the effect of TFP differences on agricultural productivity differences by 30%. Cross-country sectoral value-added per worker differences are large. Value-added per worker is much higher in non-agriculture than in agriculture in the typical country, and particularly so in poor countries. Even though these agricultural productivity gaps (APG) are large, poor countries devote most of their employment to agriculture. Based on a novel data set of value-added at the sectoral level that is comparable across provinces, I find the same patterns across provinces in China. In the second chapter, Credit Constraints, Human Capital and the Agricultural Productivity Gaps, I explore and quantify the role of financial frictions in accounting for these puzzling patterns. A two-sector heterogeneous-agent model with human capital investment, occupational choices and financial frictions is developed. Financial frictions depress human capital accumulation and distort occupational choices of rural households. Quantitatively, our model could account for a substantial portion of the observed cross-province differences in sectoral productivities and the APGs. The financial friction alone could account for 80% of the across-province differences in AGPs. It also explains 1/3 of the sectoral productivity differences and 1/5 of the differences in the agricultural employment share and the aggregate productivity across provinces. In Chapter 3, A Search-Theoretic Model of Capital Reallocation, I investigate how search frictions in the capital market affects capital reallocation across firms and the price of used capital over the business cycles. A tractable dynamic general equilibrium model is developed to account for procyclicality of capital reallocation. Firms are heterogeneous in their productivities and they trade used capital in a market which is subject to search frictions. After idiosyncratic productivity shocks are realized, firms are able to adjust their capital stock to a more favorable level before production. In the booms, the demand of used capital increases and the market tightness of used capital market is small. Hence, capital reallocation is larger and the price of used capital is higher. During the recessions, buyers demand less used capital and the market tightness is large. Consequently, capital reallocation is smaller and the price of used capital is lower. Quantitatively, the model could generate a correlation coefficient between capital reallocation and output that is consistent with the data.