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Essays on Financial Frictions and Macroeconomic Dynamics with Heterogeneous Agents

Zhang, Lini
http://rave.ohiolink.edu/etdc/view?acc_num=osu1403622765

Abstract Details

2014, Doctor of Philosophy, Ohio State University, Economics.
This dissertation develops dynamic stochastic general equilibrium (DSGE) models in which financial frictions interact with rich household heterogeneity to study the implication of financial shocks for aggregate fluctuations. The first essay "Heterogeneous Households, Mortgage Debt and Housing Demand over the Great Recession" studies the contractions in the U.S. housing market and the real economy in the Great Recession. I build a quantitative general equilibrium model with heterogeneous households and two sectors. Households face portfolio problems that involve selecting the stock of housing, mortgage debts and financial assets. The real house price is endogenous and households have the option to default on mortgage debt. The model matches the housing and non-housing moments in the U.S. data. The experiment with negative productivity shock, financial tightening and housing depreciation shock on the economy can reasonably explain the recessions in the housing market and the real economy. Specifically, the decrease of aggregate productivity accounts for the declines in aggregate output, consumption, investment, labor hours as well as part of the drop in housing production and demand. The tighter financial condition explains the large decreases in mortgage debt, leverage and housing demand. The high depreciation in housing value generates high mortgage default rate and reduces housing demand as household net worth shrink. Households deleverage and reduce mortgage debt when the financial condition is tightened or when housing value is exposed to persistently high depreciation shocks because the cost of borrowing through mortgages would increase greatly relative to the benefit of borrowing in either case. In the second essay "Credit Shocks, Entrepreneurship and the Labor Wedge", I explore the impact of credit shocks on the dispersion of firm growth rates and the countercyclicality of the labor wedge (the ratio of the marginal rate of substitution (MRS) and the marginal product of labor (MPL)). To achieve these goals, I build a model with heterogeneous entrepreneurs and incomplete financial markets in which entrepreneurs are subject to collateralized borrowing constraints. I find that in the presence of heterogeneity in both individual assets and abilities, a negative temporary credit shock can generate large and persistent contractions in output, consumption and investment. The labor wedge arises in the credit shock because the MPL is distorted downwardly as tighter borrowing constraints limit capital inputs. In the credit shock, the constrained entrepreneurs lose profits with distorted capital inputs while unconstrained entrepreneurs gain profits from lower prices. The dispersion of firm production sizes thus increases as constrained entrepreneurs endogenously exit from and unconstrained entrepreneurs endogenously enter into the production sector.
Julia Thomas, Ph.D. (Advisor)
Aubhik Khan, Ph.D. (Committee Member)
Paul Evans, Ph.D. (Committee Member)
115 p.
Economics
Financial Frictions, Housing, Mortgage Market, Default Risk, Labor Wedge, Two-sector Economy

Recommended Citations

Citations

  • Zhang, L. (2014). Essays on Financial Frictions and Macroeconomic Dynamics with Heterogeneous Agents [Doctoral dissertation, Ohio State University]. OhioLINK Electronic Theses and Dissertations Center. http://rave.ohiolink.edu/etdc/view?acc_num=osu1403622765

    APA Style (7th edition)

  • Zhang, Lini. Essays on Financial Frictions and Macroeconomic Dynamics with Heterogeneous Agents. 2014. Ohio State University, Doctoral dissertation. OhioLINK Electronic Theses and Dissertations Center, http://rave.ohiolink.edu/etdc/view?acc_num=osu1403622765.

    MLA Style (8th edition)

  • Zhang, Lini. "Essays on Financial Frictions and Macroeconomic Dynamics with Heterogeneous Agents." Doctoral dissertation, Ohio State University, 2014. http://rave.ohiolink.edu/etdc/view?acc_num=osu1403622765

    Chicago Manual of Style (17th edition)

osu1403622765
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This open access ETD is published by The Ohio State University and OhioLINK.