Topics in quantitative macroeconomics

Abstract

This thesis contributes to two traditional debates in quantitative macroeconomics: (i) the welfare costs of aggregate shocks and (ii) the role of financial integration for international business cycle co-movement and risk-sharing. In recent years both debates regained attention, in particular after the experience of the recent U.S. financial crisis and the subsequent international recession. The first chapter of this thesis, joint work with Tommaso Oliviero, investigates the welfare effects of the U.S. Great Recession. Motivated by evidence that more leveraged households lost more in terms of housing wealth during the recent recession, we quantify the welfare effects of the Great Recession for two types of households, namely borrowers and savers. We simulate the Great Recession as a contemporaneous negative shock to aggregate income and the efficiency of the financial intermediation sector. The latter moves the interest rates for debt and is therefore the main driver behind households' leverage. We find that in the Great recession borrowers lose significantly more in terms of welfare than savers. In counter-factual experiments we find this loss to be larger the higher the households' leverage. This last effect comes from non-linearity that is absent in a model with an always binding collateral constraint (i.e. constant leverage). The second chapter contributes to the debate on the role of financial integration for international business cycles. For the G7 countries, I document that country pairs with more bilateral FDI linkages have more synchronized investment cycles. I also find that the relation between FDI integration and synchronization of gross domestic product (GDP) is - yet positive - statistically insignificant after controlling for time fixed effects. I then study a model of international business cycles with an essential role for FDI and shocks to multinational activity. In the model, more FDI openness unambiguously increases investment synchronization while the effect on GDP synchronization is ambivalent. Due to mismeasurement of intangible capital in national accounts, the actual elasticity of output synchronization with respect to FDI integration is underestimated. The effects measured in the data are quantitatively consistent with the model predictions. The model also has important implications for consumption risk sharing. Finally, shocks to multinational activity have the potential to resolve the so called 'quantity puzzle' in international macroeconomics.