Essays On Financial Crises PDF Download

This dissertation applies macroeconomic and econometric tools to first improve our understanding of the causes, results, and transmission of financial crises and then use this learning to propose policies to counter them. In the first chapter, I identify a financial market externality and propose a policy to correct it. The main idea is that defaults and bankruptcy filings increase during a financial crisis, and weaken the lenders' balance sheet, which makes borrowing expensive and adversely affects economic activity in an environment where external financing is required for production. Individual agents do not internalize that collective default decision has an effect on interest rates. This paper develops a DSGE model to study this phenomenon and shows that individuals default "too much" compared to the social planner who internalizes this pecuniary externality, and can eliminate it by using bailouts. However, this encourages individual agents to increase borrowing and creates moral hazard, and therefore, an optimal policy comprises of both, ex-post bailouts, and ex-ante borrowing tax. Quantitative analysis shows that this policy increases welfare and reduces the incidence and severity of financial crises. Moreover, bond prices under this policy stochastically dominate bond prices in general equilibrium. In the second chapter, I analyze an indirect bailout response to above externality. First, I demonstrate that this policy can be used to mitigate overdefaulting, avoid financial crises, and improve welfare. Moreover, quantitative analysis provides the state contingent socially efficient indirect bailouts. Second, the paper theoretically shows that indirect bailouts can outperform direct bailouts in an imperfect information environment. In the third chapter, Arturo Lamadrid and I analyze US monetary policy's (Taper Tantrum) spillover effects o emerging economies (Mexico). Our results demonstrate that the spillovers are significant and Mexican financial market became riskier during Taper Tantrum. However, more granular analysis of loan shares by their credit worthiness and type of banks reveals that the spillover effects vary by loan type. These results lend support for better coordination among central banks to correct for the unaccounted spillovers.