Essays in dynamic macroeconomics

Abstract

The focus of my research is dynamic macroeconomics and how the economy responds to changes in government policy. During the last 30 years, the sovereign bond market in emerging economies has grown considerably and many large scale defaults were observed. Existing models of sovereign debt are unable to jointly explain the debt to output ratios and the default frequency in these countries. In the first chapter, to address this puzzle, I propose a standard small open economy model with the addition that the government transits through different political states and these transitions cannot be directly observed by lenders. Moreover, after a default, the government chooses when to renegotiate and it bargains with the lenders over the recovery rate. I show that government reputation and endogenous periods of exclusion and recovery rates play a crucial role in explaining this phenomenon. In the second chapter, I use a dynamic political economy model to evaluate whether the observed rise in wage inequality and decrease in median to mean wages can explain the increase in transfers to low earnings quintiles and increase in effective tax rates for high earnings quintiles in the U.S. over the past several decades. I conduct a welfare analysis by contrasting the solution from the political mechanism with those from a sequential utilitarian mechanism, as well as mechanisms with commitment. Finally, the third chapter focuses on explaining the dynamics of firms. I ask whether an entry/exit model like that pioneered by Hopenhayn (1992, Econometrica) with a capital accumulation decision and non-convex costs of adjustment can generate size and age dependence like that found in the data. In particular, conditional on age, growth, employment creation and destruction and volatility are decreasing in size. Moreover, conditional on size, growth, employment creation and destruction and volatility are decreasing in age. The main point of this chapter is to demonstrate that a model with no financial frictions parameterized to match the investment regularities of U.S. establishments is able to account for the simultaneous dependence of industry dynamics on size (once we condition on age) and on age (once we condition on size). To explain how the economy responds and conduct welfare analysis either one has to find natural experiments or one has to build computational models and run counterfactual experiments. My research follows the latter strategy.