Essays on the macroeconomic implications of financial frictions
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This dissertation explores the macroeconomic implications of financial frictions from three aspects. Chapter 1 develops an industry evolution model to explore the quantitative implications of endogenous financing constraints for job reallocation. In the model, firms finance entry costs and per period labor costs with long-term financial contracts signed with banks, which are subject to asymmetric information and limited commitment problems. Financing constraints arise as a feature of the optimal contract. The model generates endogenous firm exit and job reallocation in a stationary industry equilibrium. A quantitative analysis shows that endogenous financing constraints can account for a substantial amount of job reallocation observed in US manufacturing and the observed negative relationship between job reallocation rates and firm size as measured by employment. Chapter 2 studies the quantitative impact of costly external finance on aggregate productivity. Empirical studies document that resource reallocation across production units plays an important role in accounting for aggregate productivity growth in US manufacturing. Distortions in financial market could hinder the reallocation process and hence may adversely affect aggregate productivity growth. This chapter studies the quantitative impact of costly external finance on aggregate productivity through resource reallocation across firms with idiosyncratic productivity shocks. A partial equilibrium model calibrated to the US manufacturing data shows that costly external finance causes inefficient output reallocation from high productivity firms to low productivity firms and as a result leads to 1 percent loss in aggregate TFP. This is a significant loss considering that the aggregate TFP growth rate for the US manufacturing has averaged less than 2 percent per year during the post war period. Chapter 3 illustrates how occasionally binding constraints in international borrowing can help explain business cycle asymmetries in small open economies. In the model, if the borrowing constraint binds, it binds when the economy transits from a recession to an expansion, but not vice versa. As a result, on average downward movements are sharper and quicker than upward movements. The model is calibrated to the Canadian economy. A quantitative exercise suggests that international borrowing constraints can account for 16 percent of steepness asymmetry in the Canadian real per capita GDP. The model also generates high degree of deepness asymmetry in investment, and steepness asymmetry in capital stock.