Monetary Policy, Market Behavior, and Fiscal Interventions: Theoretical and Empirical Work in Hetergogeneity
Creators: name: Ramaswamy, Vasudeva Varun
Publisher: name: American University
Year: 2023
Subjects: classificationCode: 38
subject: Economics

description: Heterogeneity in behavior and circumstance plays a fundamental role in the economic behavior of agents. In the following essays, I investigate the importance of heterogeneity in three different contexts, using distinct modeling and estimation techniques. In the first essay, I study cyclical and distributional dynamics in an economy where capacity utilization choices are explicitly modeled. The axis of heterogeneity I consider lies in the production sector. In the model, firms face idiosyncratic demand uncertainty, and choose input factors (including labor) prior to observing their individual demand. When demand is realized, output is produced by varying labor effort, subject to the capacity limit implied by the firm's chosen input levels. A key feature in the setup is that productivity and capacity utilization are both procyclical in response to demand shocks. This framework admits three scenarios that are consistent with the empirical evidence, but not possible in a standard new Keynesian model. First, markups can be procyclical as firms internalize the increased probability of being capacity constrained in response to expansionary demand shocks. Second, the labor share can be counter-cyclical for the "right reasons", i.e., when labor productivity is more procyclical than wages. Finally, inflation exhibits a hump-shaped response as procyclical productivity mitigates upward pressure on prices, even though pricing is purely forward-looking. The essay investigates the conditions under which these outcomes are obtained, and sheds light on the distributional role played by nominal price and wage rigidities. Crucially, inflation can reflect both the rigidities that drive markups as well as the dynamics of firm cost. In the second essay, I use a simple order-driven model of financial-market microstructure to investigate the volatility consequences of heterogeneous forecasting and trading strategies. Specifically, I investigate if the determinants of order size decisions can produce volatility clustering. I start with the model in \citet{Chiarella.Iori-2002-QuantFin}, where near-zero-intelligence agents interact indirectly through a limit order book. To this baseline, I add volatility-based shading (\citealp{LeBaron.Palmer-2019-WP}), where trader behavior alters in response to price volatility. %chkchkchk I revisit the findings of LeBaron-Palmer studies, focusing on the features that generate volatility clustering, and extend shading strategies to traders' order-size decisions. I call this \emph{quantity shading}. In the resulting model, order size depends on price aggressiveness and traders' response to market volatility. The main finding is that when liquidity-providing traders are more quantity sensitive to volatility than liquidity-consuming traders, returns series exhibit clustering and long-range persistence in volatility. In the final essay (co-authored with Gabriel Mathy), we use heterogeneity in the implementation of a state-level spending program to recover estimates of the fiscal multiplier. Louisiana Governor Huey Long embarked on an ambitious public works and educational spending program on the eve of the Great Depression. We use the variation in state- and parish-level spending prevailing in the economy over the 1930s to estimate fiscal multipliers in the Great Depression. We find a multiplier of roughly 1 for the entire 1929-1939 period and about 1.25 for the 1929--1933 period. These estimates are similar to other studies in the Great Depression like \cite{fishback2015multiplier}, but lower than some modern studies at the zero lower bound that estimate the multiplier to be closer to 1.7--1.8 \citep{chodorow2019geographic}. We discuss factors that could explain the lower multipliers amidst record economic slack including a high share of imports, low level of human capital, small domestic production capacity, and corruption. We propose a corruption dismultiplier where corruption results in a lower fiscal multiplier due to measurement error. We use the records of indictments for corruption in the 1939-1940 Louisiana Scandals to try to correct for this error and find larger multipliers if we assume skimming of $\approx$ 2\%.