Title: Essays on Macroeconomics and Labor Markets
Description: Chapter 1 of my dissertation focuses on the effectiveness of fiscal policy in stabilizing the business cycle. Both government purchases and transfers figure prominently in the use of fiscal policy for counteracting recessions. However, existing representative agent models including the neoclassical and New Keynesian benchmark rule out transfers by assumption. This paper provides a role for transfers by building a borrower-lender model with equilibrium credit spreads and monopolistic competition. The model demonstrates that a broad class of deficit-financed government expenditures can be expressed in terms of purchases and transfers. With flexible prices and in the absence of wealth effects on labor supply, transfers and purchases have no effect on aggregate output and employment. Under sticky prices and no wealth effects, fiscal policy is redundant to monetary policy. Alternatively, in the presence of wealth effects, multipliers for both purchases and transfers will depend on the behavior of credit spreads, but purchases deliver a higher output multiplier to transfers under reasonable calibrations due to its larger wealth effect on labor supply.

When the zero lower bound is binding, both purchases and transfers are effective in counteracting a recession, but the size of the transfer multiplier relative to the purchases multiplier is increasing in the debt-elasticity of the credit spread. The second chapter of my dissertation examines the relationship between shifts in the Beveridge curve, sector-specific shocks and monetary policy. In this joint work with Dmitriy Sergeyev, we document a significant correlation between shifts in the US Beveridge curve in postwar data and periods of elevated sectoral shocks. We provide conditions under which sector-specific shocks in a multisector model augmented with labor market search frictions generate outward shifts in the Beveridge curve and raise the natural rate of unemployment. Consistent with empirical evidence, our model also generates cyclical movements in aggregate matching function efficiency and mismatch across sectors. We calibrate a two-sector version of our model and demonstrate that a negative shock to construction employment calibrated to match employment shares can fully account for the outward shift in the Beveridge curve experienced in the Great Recession (2007-2009).

The final chapter of my dissertation considers the decline in labor market turnover experienced in the US in the Great Recession, and its link to the housing crisis. In this joint work with Dmitriy Sergeyev, we analyze the behavior of job flows to test the hypothesis that the housing crisis has impaired firm formation and firm expansion by diminishing the value of real estate collateral used by firms to secure loans. We exploit state-level variation in job flows and housing prices to show that a decline in housing prices diminishes job creation and lagged job destruction. Moreover, we document differences across firm size and age categories, with middle-sized firms (20-99 employees) and new and young firms (firms less than 5 years of age) most sensitive to a decline in house prices. We propose a quantitative model of firm dynamics with collateral constraints, calibrating the model to match the distribution of employment and job flows by firm size and age. Financial shocks in our firm dynamics model depresses job creation and job destruction and replicates the empirical pattern of the sensitivity of job flows across firm age and size categories.