Three Essays On Late-2000S Crises
Three key issues have raised wide attention during the Great Recession. They are jobless recoveries in the U.S., the excessive leverage of global banking sector, and sovereign defaults in Europe. This dissertation studies each of them by chapter, yet they are all related to financing, from firms' financial conditions, to banks' borrowing, to countries' debt. Together, they concern about the relation between macroeconomics and finance from different angles. First, U.S. employment has recovered 3-6 quarters later relative to output recoveries in the post-1990 period, this has not happened before 1990s during the post-war period, which is what many call jobless recoveries. My first study explores how much firms' financial conditions (i.e., borrowing capacity) and firm-paid employee benefits (including health insurance cost) have contributed to the jobless recoveries, using a dynamic stochastic general equilibrium (DSGE) model. The paper makes four main contributions: 1) I document tighter financial conditions during recent three recoveries comparing to the ones before and show its impact on jobless recoveries and employment volatilities. 2) I document the underexplored cyclicality of per worker benefit costs and show that the costs decline during recessions and increase during recoveries. Moreover, the increases of per worker benefit costs during recent recoveries have become larger. 3) Using the financial conditions, the pro-cyclicality of benefit costs, and the costs' rising trend, this model produces 3-to-7-quarter delays in employment recoveries relative to business cycle troughs for the 1990, 2001, and 2007 recessions and no delay for the pre-1990 period. This is consistent with the data that has scarcely been matched in previous literature. 4) The calibrated model generates more than 76 percent of employment volatility, as well as most of the volatility in per worker hours and in output. The second study, coauthored with Ruud de Mooij and Tigran Poghosyan, explores how corporate taxes affect the capital structure of multinational banks. Guided by a theory of optimal capital structure, it tests (i) whether local taxes induce subsidiary banks to raise leverage in light of traditional debt bias; and (ii) whether cross-country tax differences affect intra-bank capital structure through international debt shifting. Using a novel data set for 558 commercial bank subsidiaries of the 86 largest multinational banks in the world, we find that taxes matter significantly, through both the debt bias channel and the international debt shifting. Our results imply that taxation causes international debt spillovers through multinational banks. Last, there has been a long established relationship between default and international trade in the empirical literature, however, its theoretical counterpart is scarce. My third study models the trade impact of endogenous default in a stochastic dynamic framework of two open economies that features incomplete financial markets and currency crisis (exchange rate depreciation). In the model, the exchange rate collapses due to default, therefore affecting GDP and goods trade. It predicts post-default deteriorating imports and rising exports, which is consistent with the data. This paper can be used to study both defaulter's and creditor's welfare.
employment; finance; benefit costs;; banks; tax; debt bias;; sovereign default; trade; exchange rates
Prasad, Eswar Shanker
Hallock, Kevin F.; Tsyrennikov, Viktor
Ph. D., Economics
Doctor of Philosophy
dissertation or thesis