Three essays on dynamic macroeconomics

This thesis studies macroeconomic phenomena, in which short-run fluctuation and their determinants interact with long-run changes in the economy. The first essay demonstrates empirically that the costs of a sovereign default on foreign lending in terms of lost GDP seem long-lived. Even ten years after a default, GDP is roughly six percentage points lower than it would have been without a default. I develop a small open economy model incorporating government borrowing and growth through technology adoption. The model captures stylized facts associated with emerging economies, while reproducing the long-run GDP losses. The latter is generated through reduced technology adoption after a default. Numerical experiments show that the induced cost channel increases the average debt-to-GDP ratio significantly. The second essay documents a strong association between total factor productivity (TFP) growth and the value of U.S. corporations throughout the postwar period. Persistent fluctuations in the first two moments of TFP growth predict two-thirds of the medium-term variation in the value of U.S. corporations relative to gross domestic product (henceforth value-output ratio). An increase in the conditional mean of TFP growth by 1\% is associated with a 19\% increase in the value-output ratio, while this indicator declines by 4\% following a 1\% increase in the standard deviation of TFP growth. A production based asset pricing model is developed to quantify how important the expectations of investors regarding future TFP growth are in explaining the link. Under a plausible calibration the model can account for a sizable fraction of the observed elasticity. The last essay investigates the distributional consequences of monetary policy in a New Keynesian sticky-price business cycle model. Households differ in the amount of savings, productivity, and employment status. Labor market transition rates respond to policy changes. In a downturn, accommodative monetary policy helps the bottom 80 percent of the wealth distribution at the expense of the wealthiest five percent. Such countercyclical monetary policy reduces labor market volatility, which is why, averaging over troughs and booms, consistently accommodative policy reduces savings and thus the capital stock. On balance, an accommodative monetary policy hurts the poor and benefits the wealthy

Three essays on dynamic macroeconomics

This thesis studies macroeconomic phenomena, in which short-run fluctuation and their determinants interact with long-run changes in the economy. The first essay demonstrates empirically that the costs of a sovereign default on foreign lending in terms of lost GDP seem long-lived. Even ten years after a default, GDP is roughly six percentage points lower than it would have been without a default. I develop a small open economy model incorporating government borrowing and growth through technology adoption. The model captures stylized facts associated with emerging economies, while reproducing the long-run GDP losses. The latter is generated through reduced technology adoption after a default. Numerical experiments show that the induced cost channel increases the average debt-to-GDP ratio significantly. The second essay documents a strong association between total factor productivity (TFP) growth and the value of U.S. corporations throughout the postwar period. Persistent fluctuations in the first two moments of TFP growth predict two-thirds of the medium-term variation in the value of U.S. corporations relative to gross domestic product (henceforth value-output ratio). An increase in the conditional mean of TFP growth by 1\% is associated with a 19\% increase in the value-output ratio, while this indicator declines by 4\% following a 1\% increase in the standard deviation of TFP growth. A production based asset pricing model is developed to quantify how important the expectations of investors regarding future TFP growth are in explaining the link. Under a plausible calibration the model can account for a sizable fraction of the observed elasticity. The last essay investigates the distributional consequences of monetary policy in a New Keynesian sticky-price business cycle model. Households differ in the amount of savings, productivity, and employment status. Labor market transition rates respond to policy changes. In a downturn, accommodative monetary policy helps the bottom 80 percent of the wealth distribution at the expense of the wealthiest five percent. Such countercyclical monetary policy reduces labor market volatility, which is why, averaging over troughs and booms, consistently accommodative policy reduces savings and thus the capital stock. On balance, an accommodative monetary policy hurts the poor and benefits the wealthy

Global Spillovers of a Chinese Growth Slowdown

This paper analyzes the potential spillovers of a slowdown in Chinese growth to the United States and the rest of the world. Through a combination of structural VAR and DSGE analyses, we find that (1) spillovers from China to the rest of the world have grown significantly in the past decade; (2) the negative growth spillovers to the United States are more modest than to emerging market economies—particularly for commodity exporters—or other advanced economies, primarily because the latter group has larger direct exposure in trade to China; and (3) although the United States has limited direct financial exposure to China, the negative spillovers to the U.S. economy are amplified significantly if the negative Chinese growth shock leads to adverse global risk sentiment and monetary policy in the United States is constrained in its reaction