Paul Beaudry

This thesis presents three chapters in empirical macroeconomics. The first chapter studies how the mortgage expansions in the early 2000s affect U.S. regional economies by estimating its impact on the local labor market from 2003 to 2017. Using a plausible exogenous measure of the credit supply shock, I find that counties with higher credit supply shocks have not seen significant changes in local unemployment but have shown slower wage growth. While the high-credit counties did not experience significantly different changes in local labor markets in the expansion period, they did experience larger increases in unemployment in the recession, but also recovered faster after the recession, summing to a zero net effect in the long run. Meanwhile, these counties experienced a slowdown in wage growth since the recession, resulting in a depressed wage level until 2017. Additionally, the wage decline was accompanied by a decrease in the employment share of young firms.In Chapter 2, I propose a mechanism to explain how mortgage market fluctuations affected the labor market, slowed down wage growth, and led to labor reallocation. I introduce two financial constraints, one on the household side and the other on the production side, both tied to the collateral values of houses. I show that changes in household borrowing constraints affect housing prices and thereby affect firms’ financial condition. When working capital constraint binds, mortgage market fluctuations affect firms' labor demand, which led to labor reallocation from financially constrained to unconstrained firms and a decline in wage.In Chapter 3, we study how small and micro enterprises (SMPE) respond to the policy in reducing the corporate income tax rate in China. Using gradual increases in the qualifying threshold for SMPEs during 2010-2016 as a natural experiment, we find that the rate cut led to significant increases in sales growth, investment, and productivity of affected SMPE firms. We further show that the rate cut induced micro-sized firms to enter the market.

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Why are credit booms and bubbles harmful to the economy? A dominant view points tothe risk of bust. Traditional theories of bank runs and recent theories of rational bubblesdescribe the costs of jumping to a bad equilibrium when the economy accumulates too muchdebt. In this work, I propose a theory of rational bubbles where the boom, not the ensuingbust, reduces the output by promoting a misallocation of factors.In the model presented in Chapter 2, financial markets are imperfect and the rise of a bubblealleviates credit constraints and boosts capital accumulation. However, capital accumulationoccurs in unproductive sectors and aggregate output is reduced. The result is driven by thefact that heterogeneous borrowers have an advantage with respect to issuing different types ofdebt contracts. In normal times, High-productive borrowers have higher collateral and therebyattract most of the funds. In bubbly times, borrowers can also issue “bubbly debt,” a debtthat is repaid with future debt. The possibility to keep a pyramid scheme and raise bubblydebt depends on the probability of surviving in the market. Therefore, a bubble misallocatesresources towards borrowers with low fundamental risk, even if they invest in projects withlower productivity.In Chapter 3, I propose an augmented version of the model with nominal rigidities. Thegoal is to explain the timing of expansions and recessions during “bubbly episodes.” In thisversion of the model, the initial boom in output is caused by a positive demand effect; thelong run reduction in TFP is driven by a misallocation process. In this chapter, I also analyzethe optimal policy prescriptions. In particular, I stress the importance of the central bankmonopoly on the issuing of bubble-like instruments.Finally, Chapter 4 presents an investigation of American banks’ balance sheets motivatedby the theory of the previous chapters. I test models of credit bubbles versus models of liquiditytransformation. I provide evidence that the recent expansion in liquid debt instruments canbe interpreted by the emergence of a bubble on bank’s liabilities.

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This thesis is composed of three chapters. The first chapter argues that boom-bust behavior in asset prices can be explained by a model in which boundedly-rational agents learn the process for prices. The key feature of the model is that learning operates in both the demand for assets and the supply of credit. Interactions between agents on either side of the market create complementarities in their respective beliefs, providing an additional source of propagation. In contrast, the chapter shows why learning involving only one side on the market, the focus of most of the literature, cannot plausibly explain persistent and large price booms. Quantitatively, the model explains recent experiences in US housing markets. The full appreciation in US house prices in the 2000s can be generated from observed mortgage rate changes. The model also generates endogenous liberalizations in household lending conditions during price booms and replicates key volatilities of housing market variables at business cycle frequencies.The second chapter presents a learning model in which households are endowed with recursive preferences. The chapter evaluates how the introduction of bounded rationality in beliefs effects the level of long run consumption risk in the economy. The chapter shows that structural learning frameworks currently found in the literature lead to a perception of low persistence in exogenous shocks, regardless of the underlying stochastic processes in the economy. Generating long run risk requires a preference for late resolution of uncertainty.The third chapter provides an explanation for two features of the world saving distribution: (i) saving rates are significantly different across countries and they remain different for long periods of time; and (ii) some countries and regions have shown very sharp changes in their average saving rates over short periods of time. It formalizes a model of the world economy comprised of open economies inhabited by heterogeneous agents endowed with recursive preferences. The model can generate the time series behavior of saving observed in the data from measured productivity shocks. The model can also generate the sudden and long-lived increase in East Asian savings by incorporating shocks to societal aspiration.

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This thesis contains three distinct chapters that contribute to our understanding of the causes and consequences of business cycles. Modern business-cycle models generally feature several different random shock processes that drive business cycles. Being able to reliably evaluate the individual importance of any one these shocks depends importantly on having accurate estimates of the variances of the shocks. In the first chapter, it is shown that when a model is a poor approximation to the data, typical variance estimates are biased upward. A simple procedure to identify and partially correct for these effects is proposed. Applying this procedure to a recent paper from the literature reduces the estimated variances by as much as a third of their respective naive estimates. The second chapter explores a view of recessions (typically associated with Friedrich Hayek) whereby, after a period of rapid accumulation of houses, consumer durables and business capital, the economy goes through a period of needed liquidation that results in a decline in economic activity. An alternative (typically associated with Keynes) that is often contrasted with this liquidation view is that recessions are times of deficient demand. These two views have opposite implications for fiscal policy: in the first, fiscal policy simply prolongs the needed adjustment, while in the second fiscal policy can prop up demand. This chapter argues that the two views may be more closely linked than previously recognized, in that liquidations can produce periods where the economy is characterized by deficient demand. The final chapter presents a model in which business-cycle booms and busts are inherently related, whereby a boom causes a subsequent bust, which in turn leads to another boom, and so on. In particular, it is shown how a purely deterministic model can produce fluctuations that persist indefinitely. These cycles exactly repeat themselves, while in the data business cycles are somewhat irregular. It is shown that by adding a small amount of random variation to the model, it is capable of replicating business cycle features in the data well, including their irregularity.

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This dissertation focuses on the link between corporate behavior and macroeconomic phenomena. It is comprised of three separate but related chapters: The first chapter asks whether increases in firms' outsourcing can explain the downward trend of the investment to GDP ratio of the US. I develop a model with heterogeneous firms and a fixed cost to enter outsourcing. I test the model's implications using a novel dataset collected from US computer manufacturing firms' annual reports and find that empirical facts are consistent with the model. I find outsourcing firms invest less while produce more. Also, the lessening effect of outsourcing on investment is increasing over time. In the second paper I first show that the divergent trends in the macro and micro volatility of output is nonexistent after the year 2000. Then I argue that rapid technological innovation in the 80s and 90s contributes to these divergent trends. I explain the driving force of the different patterns of volatility using a model in which firms' investment has both long term and short term gains. Higher long term gain leads more firms to invest in risky projects resulting in higher micro volatility. At the same time, more participation contributes to better diversification at the aggregate level, hence lower macro volatility. The third chapter investigates the stock market's reaction to monetary policy shocks. I use the Romer and Romer(2005) measure of policy shocks and event study approach to perform this task. I find that stock market returns respond to monetary policy shocks. There is an asymmetry in the reaction in terms of boom and recession periods, small firms are more sensitive to shocks than large firms, highly leveraged firms are more sensitive to shocks than those with less leverage. These findings shed new lights on whether monetary authority should take into account the effects on financial market when making monetary policy changes.

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This thesis focuses on the heterogeneity of price flexibility among sectors. For instance, does a multi-sector model in which the frequency of price changes differs among sectors predict radically different dynamics for aggregate variables following a monetary policy shock than a one-sector model in which sectors are assumed to be homogenous in their frequencies of price changes? Is there any relative price effect of the shocks to monetary policy in the United States? If there is, can this relative price effect be related to the heterogeneity of the frequency of price changes among sectors? What insights can be gained if dynamic stochastic open-economy models are elaborated by including the heterogeneity of price flexibility among sectors? These questions are among the types of the questions that I address in this thesis. This thesis consists of three papers. The first paper studies the effects of a monetary policy shock on output, inflation and the real wage in the United States. Next, the dynamics of these aggregate variables as predicted by the one- and multi-sector dynamic stochastic general equilibrium (DSGE) models are compared. The main finding is that the dynamics predicted by the multi-sector model are quite similar to those predicted by the one-sector model. The second paper focuses mostly on the effects of shocks to the federal funds rate on disaggregated sectors' prices in the United States. The two main empirical findings in this chapter are the substantial heterogeneity in sectoral price responses to these shocks and that the price responses in sectors are only weakly associated with their frequency of price changes. The third paper, jointly written with Emek Karaca, is concerned with the effects of positive monetary shocks on output, the real exchange rate and the price level in developing countries which have adopted an inflation targeting regime. We find that such shocks are associated with a temporary rise in output; a temporary depreciation in the real exchange rate and a sizable contemporaneous increase in the price level in those economies.

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The first chapter studies the role of mortgage constraints in life-cycle housing decisions. I argue that observed Loan-to-Value (LTV) ratios contradict the view that large down-payments limit home ownership among young households. I estimate a model of life-cycle housing decisions that includes high LTV mortgages using a method of simulated moments. The model closely replicates home ownership rates over the life-cycle, but restricted models with maximum-LTV constraints cannot. Differences in estimated parameters lead to differences in the importance of credit-frictions, family composition and income risk in shaping ownership decisions.The second chapter studies the relationships among housing consumption inequality, credit market frictions and the price of housing in the context of the recent U.S. housing boom. Loosening lending standards, falling interest rates and speculation have all been cited as potential causes of the increase in the average price of housing. I identify the relative importance of each of these causes through a structural model that is estimated using housing consumption micro data. The price of housing is an endogenous feature of the model, which explains 61.8% of actual house price growth, of which 24.8% is due to the falling real interest rate, 20.1% is due to investor speculation and the remainder is due to a loosening debt-to-income ratio constraint. The estimated model replicates the increase in housing consumption inequality observed over the time period.The third chapter compares partial and general equilibrium effects of alternative financial aid policies intended to promote college participation. We build an overlapping generations life-cycle, heterogeneous-agent, incomplete-markets model with education, labor supply, and consumption/saving decisions. Altruistic parents make inter vivos transfers. Student labor supply and government grants and loans complement parental transfers as sources of college funding. We find that the current U.S. financial aid system improves welfare, and removing it would reduce GDP by two percentage points. Relaxation of government-sponsored loan limits would have no salient effects. The short-run partial equilibrium effects of expanding tuition grants are sizeable. However, long-run general equilibrium effects are 3-4 times smaller. Every additional dollar of government grants crowds out 20-30 cents of parental transfers.

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Conventionally, it is believed that wages are primarily determined by aggregate demand for labour, treating its industrial composition as irrelevant. E.g., while trade liberalization affects aggregate labour demand and its industrial composition by differently impacting within-industry labour demands, it is deemed to affect wages mainly through the former rather than the latter. In principle, given that industries pay differently to similar workers, compositional shifts that favour high premium industries, increase the likelihood of high-paying employment and raise the value of outside options for unemployed workers within skill-groups. Consequently, wages strategically increase in all industries. Chapters 1 and 2 explore whether after controlling for changes in aggregate demand for labour, shifts in its industrial composition play an important role in determining wages.Guided by the outcome of a general equilibrium model, exogenous, trade-induced variation in change in composition of local employment across cities in Mexico and Brazil during the 1990s is used to identify the associated causal wage effects, while controlling for changes in local demands for labour. It is found that shifts in industrial composition of local employment substantially impacts local sectoral wages. Not much is known about the reasons behind differences in self-employment rate across space. While differences in local factors might matter, such factors are also impacted by changes in self-employment rate, making identification difficult. Chapter 3 asks to what extent local wages and wage-employment rate are important in determining local self-employment rate. Building on the structure provided by a multi-city, multi-industry search and bargaining model of a labour market, the 1991 and 2000 waves of the Brazilian household census data are used to identify the long-term, causal effects of local employment rate and wages on local self-employment rate across Brazilian sub-national labour markets. Exogenous variation in local structures of wages and employment across Brazilian cities that were induced by trade liberalization of the 1990s in Brazil are used as the basis of the identification strategy. It is found that reallocation to self-employment from unemployment causally, and inversely, depends on local average wage and employment rate, and is substantially more responsive to changes in local wages.

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This dissertation examines two issues in international economics and macroeconomics. The first is to understand the response of productivity to major real exchange rate appreciations and the second concerns how to compare the fits of different calibrated macroeconomic models. In the first chapter, I construct a model to clarify how the increased competition due to an exchange rate appreciation provides incentive for firms to improve productivity. However, if a firm is in an industry shielded by a high trade cost, then the incentive is weaker. In industries with fewer firms, profits are more responsive to productivity improvements, therefore, firms are more likely to invest more heavily in productivity improvement. Empirical analysis of Canadian manufacturing data from 1997 to 2006 finds evidence consistent with the model predictions.The second chapter presents testing procedures for comparison of misspecified calibrated models. The proposed tests are of the Vuong-type (Vuong, 1989; Rivers and Vuong, 2002). In the framework here, an econometrician selects values for the parameters in order to match some characteristics of the data with those implied by the theoretical model. We assume that all competing models are misspecified, and suggest a test for the null hypothesis that all considered models provide equal fit to the data characteristics, against the alternative that one of the models is a better approximation.The Carlstrom and Fuerst (1997) model and the Bernanke, Gertler and Gilchrist (1999) model are two leading models that study financial frictions in macroeconomic models. In particular, these models show that due to financial frictions, net worth plays an important role in obtaining external finance, and that at an aggregate level, net worth can propagate technology shocks and monetary shocks. However, neither paper examines whether the models can reproduce cyclical properties of net worth. The third chapter addresses this issue by applying the comparison method developed in the third chapter. Results indicate both models do reasonably well. In addition, price rigidity seems to play an important role in the latter model. However, both models can only partially capture the positive correlation between risk premium and net worth.

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Compared to the previous twenty years, residential investments in the US appear more stable after the mid-1980s. Chapter 2 explores key hypotheses regarding the underlying causes. In particular, it uses estimated DSGE models to examine whether a more responsive interest rate policy stabilizes the housing market by keeping inflation in check. These estimations indeed found a policy that has become more responsive over time. Counter-factual analysis confirms that the change stabilizes inflation as well as nominal interest rate. It does not, however, find the change in policy to have stabilizing effect on real economic activity including housing investment. It finds that smaller TFP shocks make modest contributions, while the biggest contributing factor to the fall in the housing volatility is a reduction in the sensitivity of the investment to demand variations.Chapter 3 constructs a richly specified model for the housing market to examine the empirical relevance of various costs and frictions, including the investment adjustment cost, sticky construction costs, search frictions, and sluggish adjustment of house prices. Using the US national-level quarterly data from 1985 and 2007, we find that the gradual adjustment of house prices is the most important and irreplaceable feature of the model. The key to developing an optimization-based empirical housing model, therefore, is to provide a structural interpretation for the slow adjustment in house prices.Chapter 4 uses US national-level time series of residential investment, price index of new houses, consumption and interest rate to explore whether the US, as a nation, experienced a drop in the price elasticity of supply of new housing. Maximum likelihood estimations with a simple stock-and-flow model found a statistically significant drop of the elasticity from 10 to 2.2, when the quarterly data between 1971 and 2007 are split at 1985. A richer model with mechanisms of gradual adjustment also indicates such a reduction, when existing knowledge about the adjustment parameters is incorporated in the analysis. For the Federal Reserve, an inelastic supply can be a source of concern, because policy-driven demand in housing market is more likely to trigger undesirable swings in prices.

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No abstract available.