Frictions and incomplete markets: Three essays in macroeconomics
The three essays in this dissertation assess the importance of asset market frictions for the macroeconomy. Chapter 1 is a quantitative investigation of the short run real effects of changes in the timing of taxes in an economy in which households face uninsurable idiosyncratic risk and are not permitted to borrow. Given a distribution of asset holdings across households resembling that in the United States, this market structure can account for large immediate aggregate consumption responses to lump-sum tax changes. In simulations, the response to a tax change is found to vary considerably depending on (i) the shape of the asset holding distribution, (ii) the quantity of government debt, and (iii) the direction of the tax change. The consumption of households with very low wealth is highly sensitive to changes in the tax level, and in equilibrium the fraction of such households is often large. Chapter 2 (based on a paper co-authored with Fabrizio Perri) uses a two-good, two-country real business cycle model to compare a world in which no assets are traded internationally (financial autarky) with two alternative worlds: one in which markets are complete, and another in which a single non-contingent bond is traded. In the data, investment and employment tend to be positively correlated across countries; international consumption correlations are typically lower than international output correlations; and international relative prices are highly volatile. With stationary productivity shocks, only the financial autarky model can simultaneously account for all of these stylized facts. Chapter 3 considers the effects on the real interest rate of unanticipated shocks to inflation in a general equilibrium overlapping-generations Baumol-Tobin model. Consumers face cash-in-advance constraints, and can trade government bonds for cash at any date subject to paying a fixed cost. The government chooses a path for goods prices and is required to hold government spending constant. The path for the price of bonds is endogenous. Even when participation in the asset market is allowed to respond optimally to price movements, an unanticipated increase in inflation is found to lead to a large immediate increase in the real interest rate.
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|Authors:||Heathcote, Jonathan Harvey Douglas|
|Type of publication:||Other|
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