Essays on Macroeconomics

Essays on Macroeconomics Keshav Dogra The three chapters of my dissertation study the effect of access to credit on economic volatility and welfare, and the implications for policy. Chapter 1 presents a unified framework to analyze debt relief and macroprudential policies in a liquidity trap when households have private information. I develop a model with a deleveraging-driven recession and a liquidity trap in which households differ in their impatience, which is unobservable. Ex post debt relief stimulates the economy, but anticipated debt relief encourages overborrowing ex ante, making savers worse off. Macroprudential taxes and debt limits prevent the recession, but can harm impatient households, since the planner cannot directly identify and compensate them. I solve for optimal policy, subject to the incentive constraints imposed by private information. Optimal allocations can be implemented either by providing debt relief to moderate borrowers up to a maximum level, combined with a marginal tax on debt above the cap, or with ex ante macroprudential policy a targeted loan support program, combined with a tax on excessive borrowing. These policies are ex ante Pareto improving in a liquidity trap; in normal times, however, they are purely redistributive. These results extend to economies with aggregate uncertainty, alternative sources of heterogeneity, and endogenous labor supply. The second chapter of my dissertation presents a theoretical framework to understand sovereign debt crises in a monetary union and the optimal policy response to these crises. The risk of default encourages indebted countries to pay down their short term debt, depressing consumption demand throughout the union. This fall in demand can cause the monetary union to hit the zero lower bound on nominal interest rates, leading to a union-wide recession. I evaluate three policies to prevent such a recession: debt relief, which writes off a portion of short term debt; lending policy, which allows indebted countries to issue new debt at above-market prices; and debt postponement, which converts short into long term debt. I show that if countries can be prevented from retrading in secondary markets after debt restructuring, all three policies are equivalent, and are welfare improving. If retrading is possible, lending policy and debt postponement are superior to debt relief. The final chapter of my dissertation evaluates the impact of increased income uncertainty and financial liberalization in the US on consumption volatility and welfare at the household level. In this joint work with Olga Gorbachev, we estimate Euler equations using consumption data from the Panel Study of Income Dynamics, and measure the volatility of unpredictable changes in consumption as the squared residuals. We directly control for liquidity constraints using data on access to credit from the Survey of Consumer Finances, and document that despite the increase in household debt between 1983 and 2007, there was no decline in the proportion of liquidity constrained households. Consumption volatility increased significantly over this period, especially for liquidity constrained households, indicating substantial welfare losses.