Essays in Macroeconomics

Abstract

This thesis is composed of three self-contained chapters that explore how household heterogeneity shapes macroeconomic outcomes, and how this in turn determines the effects of macroeconomic policies. <br /> The first chapter explores how households' need to self-insure against unemployment risk shapes the stabilization consequences of hiring subsidies provided to firms in an environment where conventional monetary policy is constrained. In a New Keynesian model with equilibrium unemployment and incomplete markets, the chapter looks at a hiring subsidy that stimulates employment. Households' desire to accumulate precautionary savings falls, raising consumption and aggregate demand. Calibrating the model to the US, the ensuing increase in inflation renders the hiring stimulus effective precisely when the central bank cannot further support aggregate demand. Instead, absent idiosyncratic risk, and thus the expansionary demand-side effects, the hiring stimulus is crowded-out. <br /> The second chapter investigates the interaction between government spending multipliers and the duration of unemployment insurance benefits. Using US regional data, it shows empirically that exogenous extensions of UI benefits render local fiscal multipliers smaller. Next, it interprets the empirical findings through a New Keynesian small-open-economy model with heterogeneous households and equilibrium unemployment. The model attributes the origin of state-dependent multipliers to the non-linear response of UI policy: an increase in government spending lowers unemployment, reducing the duration of UI benefits only to the extent that these have been extended previously. As a result of lower insurance, households reduce consumption and hence the fiscal multiplier is smaller. <br /> The third chapter offers a new perspective on the macroeconomic consequences of financial frictions in the banking system, through the role of banks as suppliers of liquid assets to households. It shows that tight financial conditions render economies less resilient to shocks that lead households to demand more liquid savings. First, it provides empirical evidence that one such shock, a shock to household income uncertainty, leads to a deeper recession and a muted creation of liquid deposits when financial conditions are tight. Next, it rationalizes this in a two-asset New Keynesian model with heterogeneous households and a leverage constraint in the banking system that constrains liquidity transformation. A binding leverage constraint impairs the intermediation of precautionary savings, dampens the rise of both bank credit and liquid deposits, and leaves the increased demand for liquidity unsatisfied. This, finally, leads to a marked fall in household consumption.