Three Essays in Quantitative Macroeconomics

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TONG, Liang, 2020. Three Essays in Quantitative Macroeconomics [Dissertation]. Konstanz: University of Konstanz

@phdthesis{Tong2020Three-50503, title={Three Essays in Quantitative Macroeconomics}, year={2020}, author={Tong, Liang}, address={Konstanz}, school={Universität Konstanz} }

Tong, Liang This thesis presents three essays in the field of empirical and quantitative macroeconomics. The essays focus on the macroeconomic consequences of credit-market imperfections. The first chapter is about the dynamics of the sovereign credit, while the rest two chapters are on the corporate/business credit. In terms of methodologies, panel-data approaches are applied in both Chapter 1 and Chapter 2. Structural quantitative methods, on the other hand, are used in Chapter 1 and Chapter 3.<br /><br />In Chapter 1, which is joint work with Almuth Scholl, we study the dynamic interaction between sovereign default risk, taxation, and the underground economy. The study is motivated by the observation that in the wake of sovereign debt crises, many countries have adopted fiscal consolidation policies in order to reduce public debt and to restore creditworthiness. However, particularly in crisis-prone countries, substantial underground activities undermine tax enforcement. We first conduct an empirical analysis. For a large sample of countries, we find that the size of the underground economy is positively correlated with sovereign debt and interest spreads. We rationalize these empirical regularities within a quantitative model of sovereign default that explicitly accounts for underground activities. We study optimal fiscal policy in the presence of limited tax enforcement and default risk using the concept of Markov-perfect equilibria, in which the government moves first and the households form expectations about future public policies. In a quantitative exercise, we analyze the properties of optimal public policies and the private sector's responses and study the dynamics of a default event with particular focus on the underground sector. Our simulation results reveal that the theoretical framework replicates the empirical regularities very well. In particular, our model predicts that the size of the underground economy is positively correlated with sovereign debt and interest spreads. We show that during a debt crises, the dynamic interaction between sovereign default risk and the underground economy creates a vicious circle: Higher sovereign risk premia tighten the endogenous borrowing constraint and force the government to raise taxes. Tax hikes, however, induce the private sector to invest less and to evade taxes by producing in the underground sector. In turn, falling tax revenues force the government to either implement further tax hikes or to default. Eventually, rasing taxes becomes too costly and the government finds it optimal to default Our quantitative findings suggest that the underground economy fosters sovereign default risk and deepens debt crises.<br /><br />In the second chapter, we ask the following question: Has the financial sector become more efficient over time? It is natural to believe that the financial efficiency has improved, at least in an advanced economy such as the United States. However, some authors, such as Philippon (2015) and Bazot (2018), show that it might not be the case. This chapter revisits the estimation of financial efficiency. In this chapter, we propose a regression method to assess the time trend in the firm's intermediation cost of external credit. We define the intermediation cost as the part of the unit cost of the external credit finance that is unrelated to the risk premium. We find that the intermediation cost has decreased significantly over the period of 1983Q1-2007Q4, which has substantially reduced firm's borrowing cost. On average, the fall in the intermediation cost leads to a reduction by 0.57-0.71 percentage point in the ratio of interest expense over revenue, and a decrease by 0.78-0.79 percentage point in the ratio of interest expense over book value of debt. The estimation results are robust against different sample components and against alternative measures of the risk-free rate and inflation. The reduction in the intermediation cost implies that the financial efficiency has improved in the US corporate credit market. We also assess the cross-sectional average risk premium and unit cost over the same period of time, but find mixed results.<br /><br />Chapter 3 is motivated by the empirical evidence in Chapter 2, and explores the macroeconomic implications of such decrease in the intermediation cost. The chapter is motivated by the fact that over the past decades, there has been a dramatic credit boom in the United States, coupled with decreasing asset returns and rising inequality. It analyzes whether the decreasing intermediation cost of borrowing is an explanation for these developments. We first construct a simple two-period model, followed by a fully dynamic model based on Angeletos (2007), which we apply to the United States in a quantitative exercise. We find that the macroeconomic effects of the fall in intermediation costs are amplified by two feedback loops: one is between the capital market and the credit market, and another is between the capital-credit market and the wealth distribution. We show that, due to lower intermediation costs, the credit market experiences a "simultaneous" expansion of credit demand and credit supply. As a result, the real risk-free interest rate barely changes. The capital market also expands, leading to a decrease in the returns on capital. The feedback loops exaggerate the capital-income risk and increase the average returns on investment among leveraged investors, driving up the overall wealth and income inequality. In a quantitative exercise, we find that much of the rise in the top-end wealth inequality during 1980-2007 could be explained by the reduction in the intermediation costs. In terms of welfare, we find that the welfare decreases for the households in the bottom-90% wealth group, while it improves for households in other groups. 2020-08-14T09:02:34Z eng Tong, Liang terms-of-use 2020 2020-08-14T09:02:34Z Three Essays in Quantitative Macroeconomics

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