2015 Theses Doctoral

Essays in Macroeconomics and Finance

Ottonello, Pablo

This dissertation contains three essays on Macroeconomics and Finance. The first chapter has been motivated by the fact that recoveries from financial crises are characterized by low investment rates and declines in capital stocks. The paper constructs an equilibrium framework in which financial shocks have a persistent effect on aggregate investment. The key assumption is that physical capital is traded in a decentralized market with search frictions, generating ``capital unemployment.'' After a negative financial shock, the share of unemployed capital is high, and the economy dedicates more resources to absorbing existing unemployed capital into production, and less to accumulating new capital. An estimation of the model for the U.S. economy using Bayesian techniques shows that the model can generate the investment persistence and half of the output persistence observed in the Great Recession. Investment search frictions also lead to a different interpretation of the sources of business-cycle fluctuations, with a larger role for financial shocks, which account for 33 percent of output fluctuations. Extending the model to allow for heterogeneity in match productivity, the framework also provides a mechanism for procyclical capital reallocation, as observed in the data.
The second and third chapters focus on labor unemployment during financial crises. The second chapter uses a sample of 116 recession episodes in developed and emerging market economies to compare the labor-market recovery during financial crises with that of other recession episodes. It documents two new stylized facts. First, labor-market recovery from financial crises is characterized by either higher unemployment (``jobless recovery'') or a lower real wage (``wageless recovery''). Second, inflation determines the type of recovery: low inflation (below 30 percent annual rate) is associated with jobless recovery, while high inflation is associated with wageless recovery. The paper shows that this pattern of labor recovery from financial crises is consistent with a simple model in which collateral requirements are higher (lower) when a larger share of labor costs (physical capital expenditure) is involved in a loan contract.
The third chapter paper conducts a quantitative study of the optimal exchange-rate policy in a small open economy that faces the ``credit access-unemployment'' trade-off: In the presence of nominal wage rigidity, exchange-rate depreciation reduces unemployment; in the presence of collateral constraints linking external debt to the value of income, exchange-rate depreciation tightens the collateral constraint and leads to higher consumption adjustment. It is shown that the optimal policy during financial crises generally features large currency depreciation, since welfare costs related to higher unemployment and lower consumption typically outweigh welfare costs associated with intertemporal misallocation of consumption. The optimal policy also implies a lower currency depreciation than that necessary to achieve full employment, which is consistent with a managed-floating exchange-rate policy, frequently observed during financial crises in emerging market economies. Sudden stops (or large current-account adjustments) are part of the endogenous response to large negative shocks under the optimal exchange-rate policy.