Essays on finance and macroeconomics

Thesis (Ph. D.)--Massachusetts Institute of Technology, Dept. of Economics, 2013.Cataloged from PDF version of thesis.Includes bibliographical references (p. 91-94).This thesis studies the role of the financial system in the amplification and propagation of business cycles. Chapter 1 studies the origin and propagation of balance sheet recessions. I first show that in standard models driven by TFP shocks, the balance sheet channel disappears when agents are allowed to write contracts on the aggregate state of the economy. In contrast, I show how uncertainty shocks can drive balance sheet recessions with depressed asset prices and growth, and trigger a "flight to quality" event with low interest rates and high risk-premia. Uncertainty shocks create an endogenous hedging motive that induces financial intermediaries to take on a disproportionate fraction of aggregate risk, even when contracts can be written on the aggregate state of the economy. Finally, I explore some implications for financial regulation. Chapter 2 studies a tractable model of dynamic moral hazard with purely pecuniary private benefits. The agent can trade a productive asset and secretly divert funds to a private account and use them to "recontract": at any time he can offer a new continuation contract to the principal, who accepts if the new contract is attractive. The main result is that the optimal contract can be characterized as the solution to a standard portfolio problem with a simple "skin in the game" constraint. The setting places few restrictions on preferences and the distribution of shocks, distinguishes between (observable) aggregate shocks and (unobservable) idiosyncratic shocks, and takes arbitrary general equilibrium prices as given. This makes the results easily applicable to many macro and financial applications. Chapter 3 explores under what conditions the presence of moral hazard can create a balance sheet amplification channel. If the private action of the agent exposes him to aggregate risk through his unobserved private benefit, the optimal contract will try to over-expose him to aggregate risk to deter him from misbehaving. This creates a tradeoff between aggregate and idiosyncratic risk-sharing. More productive agents naturally want to leverage more and therefore have larger incentives to distort their aggregate risk-sharing in order to reduce their exposure to idiosyncratic risk. In equilibrium, therefore, more productive agents take on a disproportionate fraction of aggregate risk, creating a balance sheet channel.by Sebastian T. Di Tella.Ph.D

The Emerging Aversion to Inequality: Evidence from Poland 1992-2005

This paper provides an illustration of the changing tolerance for inequality in a context of radical political and economic transformation and rapid economic growth. We focus on the Polish experience of transition and explore self-declared attitudes of the citizens. Using monthly representative surveys of the population, realized by the Polish poll institute (CBOS) from 1992 to 2005, we identify a structural break in the relation between income inequality and subjective evaluation of well-being. The downturn in the tolerance for inequality (1997) coincides with the increasing distrust of political elites.http://deepblue.lib.umich.edu/bitstream/2027.42/64387/1/wp919.pd

Pruning strategies for efficient online globally consistent mosaicking in fetoscopy

Twin-to-twin transfusion syndrome is a condition in which identical twins share a certain pattern of vascular connections in the placenta. This leads to an imbalance in the blood flow that, if not treated, may result in a fatal outcome for both twins. To treat this condition, a surgeon explores the placenta with a fetoscope to find and photocoagulate all intertwin vascular connections. However, the reduced field of view of the fetoscope complicates their localization and general overview. A much more effective exploration could be achieved with an online mosaic created at exploration time. Currently, accurate, globally consistent algorithms such as bundle adjustment cannot be used due to their offline nature, while online algorithms lack sufficient accuracy. We introduce two pruning strategies facilitating the use of bundle adjustment in a sequential fashion: (1) a technique that efficiently exploits the potential of using an electromagnetic tracking system to avoid unnecessary matching attempts between spatially inconsistent image pairs, and (2) an aggregated representation of images, which we refer to as superframes, that allows decreasing the computational complexity of a globally consistent approach. Quantitative and qualitative results on synthetic and phantom-based datasets demonstrate a better trade-off between efficiency and accuracy

Technical note: Probabilistic visual and electromagnetic data fusion for robust drift-free sequential mosaicking: Application to fetoscopy

The most eâ†μective treatment for Twin-To-Twin Transfusion Syndrome is laser photocoagulation of the shared vascular anastomoses in the placenta. Vascular connections are extremely challenging to locate due to their caliber and the reduced field of view of the fetoscope. Therefore, mosaicking techniques are beneficial to expand the scene, facilitate navigation and allow vessel photocoagulation decision-making. Local vision-based mosaicking algorithms inherently drift over time due to the use of pairwise transformations. We propose the use of an electromagnetic tracker (EMT) sensor mounted at the tip of the fetoscope to obtain camera pose measurements, which we incorporate into a probabilistic framework with frame-To-frame visual information to achieve globally consistent sequential mosaics. We parametrize the problem in terms of plane and camera poses constrained by EMT measurements to enforce global consistency while leveraging pairwise image relationships in a sequential fashion through the use of Local Bundle Adjustment. We show that our approach is drift-free and performs similarly to state-of-The-Art global alignment techniques like Bundle Adjustment albeit with much less computational burden. Additionally, we propose a version of Bundle Adjustment that uses EMT information. We demonstrate the robustness to EMT noise and loss of visual information and evaluate mosaics for synthetic, phantom-based and ex vivo datasets

On the monotone stability approach to BSDEs with jumps: Extensions, concrete criteria and examples

We show a concise extension of the monotone stability approach to backward stochastic differential equations (BSDEs) that are jointly driven by a Brownian motion and a random measure for jumps, which could be of infinite activity with a non-deterministic and time inhomogeneous compensator. The BSDE generator function can be non convex and needs not to satisfy global Lipschitz conditions in the jump integrand. We contribute concrete criteria, that are easy to verify, for results on existence and uniqueness of bounded solutions to BSDEs with jumps, and on comparison and a-priori $L^{\infty}$-bounds. Several examples and counter examples are discussed to shed light on the scope and applicability of different assumptions, and we provide an overview of major applications in finance and optimal control.Comment: 28 pages. Added DOI https://link.springer.com/chapter/10.1007%2F978-3-030-22285-7_1 for final publication, corrected typo (missing gamma) in example 4.1

Nominal or Real? The Impact of Regional Price Levels on Satisfaction with Life

According to economic theory, real income, i.e., nominal income adjusted for purchasing power, should be the relevant source of life satisfaction. Previous work, however, has only studied the impact of inflation adjusted nominal income and not taken into account regional differences in purchasing power. Therefore, we use a novel data set to study how regional price levels affect satisfaction with life. The data set comprises about 7 million data points that are used to construct a price level for each of the 428 administrative districts in Germany. We estimate pooled OLS and ordered probit models that include a comprehensive set of individual level, time-varying and time-invariant control variables as well as control variables that capture district heterogeneity other than the price level. Our results show that higher price levels significantly reduce life satisfaction. Furthermore, we find that a higher price level tends to induce a larger loss in life satisfaction than a corresponding decrease in nominal income. A formal test of neutrality of money, however, does not reject neutrality of money. Our results provide an argument in favor of regional indexation of government transfer payments such as social welfare benefits

Crime and happiness amongst heads of households in Malawi

This paper uses 2005 Malawian data to investigate the link between crime and happiness in Malawi. Detailed descriptive statistics reveal that crime is a gendered issue and econometric analyses show that males and females respond differently to different crime variables. In particular, for males being attacked has a negative impact on happiness and neighbourhood crime rates have a U-shaped effect on happiness with happiness at its lowest when 11. 2% of respondents in a neighbourhood reported being a victim. For females only a subjective feeling of insecurity impacts negatively on happiness. © 2009 Springer Science+Business Media B.V