Essays on macroeconomic dynamics: learning, uncertainty, and heterogeneity in credit crises

Yeromonahos, Mallory (2021). Essays on macroeconomic dynamics: learning, uncertainty, and heterogeneity in credit crises. University of Birmingham. Ph.D.

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Abstract

This thesis covers two research topics. Chapter 2 is an investigation into the properties of the equity risk premium and its relationships with uncertainty and macroeconomic fluctuations. A large literature suggests that the expected equity risk premium is countercyclical. Using a variety of different measures for this risk premium, we document that it also exhibits growth asymmetry, i.e. the risk premium rises sharply in recessions and declines much more gradually during the following recoveries. We show that a model with recursive preferences, in which agents cannot perfectly observe the state of current productivity, can generate the observed asymmetry in the risk premium. Key for this result are endogenous fluctuations in uncertainty which induce procyclical variations in agent's nowcast accuracy. In addition to matching moments of the risk premium, the model is also successful in generating the growth asymmetry in macroeconomic aggregates observed in the data, and in matching the cyclical relation between quantities and the risk premium.

Chapters 3 and 4 are an investigation into the distribution and dynamics of household debt. We present new empirical facts on the distributional dynamics of household debt around the Great Recession in the US using survey data from the Panel Study of Income Dynamics. We document
that it is the 60% of households toward the middle of the income distribution that are responsible for the aggregate reduction of debt from the onset of the financial crisis in 2007 until 2015, not the 40% in the tails of the distribution. We extend the current class of heterogeneous-household models by explicitly tracking the distributions of gross debt and gross savings separately during a simulated credit crunch - instead of calculating exclusively the net financial positions of households as in the standard framework. The model successfully replicates the relative importance of the different income groups in the aggregate reduction of household debt. The results are driven by endogenous heterogeneity in the intertemporal utility cost of debt. In addition, the models provides new insights into the effectiveness of monetary policy when households are highly indebted. We show that collateralised debt is a stronger channel than liquid savings for the transmission of monetary policy.

Type of Work:

Thesis (Doctorates > Ph.D.)

Award Type:

Doctorates > Ph.D.

Supervisor(s):