Capital Deepening and Non-Balanced Economic Growth

This paper constructs a model of non-balanced economic growth. The main economic force is the combination of differences in factor proportions and capital deepening. Capital deepening tends to increase the relative output of the sector with a greater capital share (despite the equilibrium reallocation of capital and labor away from that sector). We first illustrate this force using a general two-sector model. We then investigate it further using a class of models with constant elasticity of substitution between two sectors and Cobb- Douglas production functions in each sector. In this class of models, non-balanced growth is shown to be consistent with an asymptotic equilibrium with constant interest rate and capital share in national income. Finally, we construct and analyze a model of “nonbalanced endogenous growth,†which extends these results to an economy with endogenous and directed technical change, and demonstrates that non-balanced technological progress can be an equilibrium phenomenoncapital deepening, endogenous growth, multi-sector growth, non-balanced

Liquidity and Trading Dynamics

How do financial frictions affect the response of an economy to aggregate shocks? In this paper, we address this question, focusing on liquidity constraints and uninsurable idiosyncratic risk. We consider a search model where agents use liquid assets to smooth individual income shocks. We show that the response of this economy to aggregate shocks depends on the rate of return on liquid assets. In economies where liquid assets pay a low return, agents hold smaller liquid reserves and the response of the economy tends to be larger. In this case, agents expect to be liquidity constrained and, due to a self-insurance motive, their consumption decisions are more sensitive to changes in expected income. On the other hand, in economies where liquid assets pay a large return, agents hold larger reserves and their consumption decisions are more insulated from income uncertainty. Therefore, aggregate shocks tend to have larger effects if liquid assets pay a lower rate of return.

Credit Crises, Precautionary Savings, and the Liquidity Trap

We study the effects of a credit crunch on consumer spending in a heterogeneous-agent incomplete-market model. After an unexpected permanent tightening in consumers’ borrowing capacity, some consumers are forced to deleverage and others increase their precautionary savings. This depresses interest rates, especially in the short run, and generates an output drop, even with flexible prices. The output drop is larger with nominal rigidities, if the zero lower bound prevents the interest rate from adjusting downwards. Adding durable goods to the model, households take larger debt positions and the output response may be larger.

Fund managers, career concerns, and asset price volatility

We propose a model of delegated portfolio management with career concerns. Investors hire fund managers to invest their capital either in risky bonds or in riskless assets. Some managers have superior information on the default probability. Looking at the past performance, investors update beliefs on their managers and make firing decisions. This leads to career concerns which affect investment decisions, generating a positive or negative “reputational premium.” For example, when the default probability is high, the return on the risky bond has to be high to compensate the uninformed managers for the high risk of being fired. As the default probability changes over time, the reputational premium amplifies price volatility.Asset pricing

Capital Deepening and Non-Balanced Economic Growth

This paper constructs a model of non-balanced economic growth. The main economic force is the combination of differences in factor proportions and capital deepening. Capital deepening tends to increase the relative output of the sector with a greater capital share, but simultaneously induces a reallocation of capital and labor away from that sector. We first illustrate this force using a general two-sector model. We then investigate it further using a class of models with constant elasticity of substitution between two sectors and Cobb-Douglas production functions in each sector. In this class of models, non-balanced growth is shown to be consistent with an asymptotic equilibrium with constant interest rate and capital share in national income. We also show that for realistic parameter values, the model generates dynamics that are broadly consistent with US data. In particular, the model generates more rapid growth of employment in less capital-intensive sectors, more rapid growth of real output in more capital-intensive sectors and aggregate behavior in line with the Kaldor facts. Finally, we construct and analyze a model of “non-balanced endogenous growth,” which extends the main results of the paper to an economy with endogenous anddirected technical change. This model shows that equilibrium will typically involve endogenous non-balanced technological progress.

Dynamic Adverse Selection: A Theory of Illiquidity, Fire Sales, and Flight to Quality

We develop a dynamic equilibrium model of asset markets affected by adverse selection. There exists a unique equilibrium where better assets trade at higher prices but in less liquid markets. Sellers of high-quality assets can separate because they are more willing to accept a lower trading probability. As a result, the emergence of adverse selection generates a drop in liquidity. It may also lead to a decline in the price-dividend ratio—a fire sale—and a flight to quality. Subsidies to purchasing assets may be Pareto improving and can reverse the fire sale and flight to quality.

Endogenous gentrification and housing price dynamics

Using a unique dataset of interest rates offered by a large sample of U.S. banks on various retail deposit and loan products, we explore the rigidity of bank retail interest rates. We study periods over which retail interest rates remain fixed ("spells") and document a large degree of lumpiness of retail interest rate adjustments as well as substantial variation in the duration of these spells, both across and within different products. To explore the sources of this variation we apply duration analysis and calculate the probability that a bank will change a given deposit or loan rate under various conditions. Consistent with a nonconvex adjustment costs theory, we find that the probability of a bank changing its retail rate is initially increasing with time. Then as heterogeneity of the sample overwhelms this effect, the hazard rate decreases with time. The duration of the spells is significantly affected by the accumulated change in money market interest rates since the last retail rate change, the size of the bank and its geographical scope.Housing - Prices ; Gentrification

The End of the American Dream? Inequality and Segregation in US cities

Since the '80s the US has experienced not only a steady increase in income inequality, but also a contemporaneous increase in residential segregation by income. Using US Census data, we document a positive correlation between income inequality and residential segregation between 1980 and 2010, both across time and across space, at the MSA level. We then develop a general equilibrium overlapping generations model where parents choose the neighborhood where to raise their children and invest in their children's human capital. In the model, segregation and inequality amplify each other because of a local spillover that affects the returns to education. We calibrate the model to 1980 using Census data and the micro estimates of the local spillover effect derived by Chetty and Hendren (2018b). We then hit the economy with a skill premium shock and show that 20% of the increase in inequality in the short run, and 29% in the long run can be attributed to the feedback effect of the local spillover

Fund Managers, Career Concerns, and Asset Price Volatility

We propose a model where investors hire fund managers to invest either in risky bonds or in riskless assets. Some managers have superior information on the default probability. Looking at the past performance, investors update beliefs on their managers and make firing decisions. This leads to career concerns which affect investment decisions, generating a positive or negative "reputational premium". For example, when the default probability is high, uninformed managers prefer to invest in riskless assets to reduce the probability of being fired. As the economic and financial conditions change, the reputational premium amplifies the reaction of prices and capital flows.

Essays on the macroeconomics of the labor markets

Thesis (Ph. D.)--Massachusetts Institute of Technology, Dept. of Economics, 2006.Includes bibliographical references.In Chapter 1, I study the efficiency properties of competitive search equilibria in economies with informational asymmetries. Employers and workers are both risk-neutral and ex-ante homogeneous. I characterize an equilibrium where employers post contracts and workers direct their search towards them. When a match is formed, the disutility of labor is drawn randomly and observed privately by the worker. An employment contract is an incentive-compatible mechanism that satisfies a participation constraint on the worker's side. I first show that in a static setting the competitive search equilibrium is constrained efficient, that is, it cannot be Pareto improved by a Social Planner subject to the same informational and participation constraints faced by the decentralized economy. I then show that in a dynamic setting, on the contrary, the equilibrium can be constrained inefficient. The crucial difference between the static and the dynamic environment is that the worker's outside option is exogenously given in the former, while in the latter it is endogenously determined as the equilibrium continuation utility of unemployed workers. Inefficiency arises because the worker's outside option affects the ex-ante cost of information revelation, generating a novel externality which is not internalized by competitive search.(cont.) In Chapter 2, I explore whether match-specific heterogeneity, with or without full information, can amplify the responsiveness of unemployment rate and market tightness to productivity shocks. On the contrary, I show that heterogeneity can dampen the response of market tightness to productivity, once one calibrates the model to match two main facts: the finding rate and the finding rate elasticity to market tightness. First, I show a theoretical result for the steady state analysis in the extreme case of no aggegate shock. Then, I report the calibration exercise for alternative specification of the idiosyncratic shocks distribution. Chapter 3 is the product of joint work with Daron Acemoglu and constructs a model of non-balanced economic growth. The main economic force is the combination of differences in factor proportions and capital deepening. Capital deepening tends to increase the relative output of the sector with a greater capital share (despite the equilibrium reallocation of capital and labor away from that sector). We first illustrate this force using a general two-sector model. We then investigate it further using a class of models with constant elasticity of substitution between two sectors and Cobb-Douglas production functions in each sector.(cont.) In this class of models, non-balanced growth is shown to be consistent with an asymptotic equilibrium with constant interest rate and capital share in national income. We investigate whether for realistic parameter values, the model generates transitional dynamics that are consistent with both the more rapid growth of some sectors in the economy and aggregate balanced growth facts. Finally, we construct and analyze a model of "non-balanced endogenous growth," which extends the main results of the paper to an economy with endogenous and directed technical change. This model shows that non-balanced technological progress will generally be an equilibrium phenomenon.by Veronica Guerrieri.Ph.D