Essays in macroeconomics : confidence, business cycles, and fertility

Abstract

This thesis comprises essays in macroeconomics across two main themes. The first studies the role of confidence shocks as a source of business cycle fluctuations using an instrumental variable approach. Exogenous drops in consumer confidence are identified by using school and mass shootings in the U.S. as natural experiments. Such autonomous drops in confidence are, in turn, found to sizably and persistently depress consumption and economic activity, raise prices, and reduce nominal interest rates. These empirical findings are shown to be consistent with a model in which negative confidence shocks reduce expectations of future technology, prompting consumers to save for wealth and precautionary motives, firms to reduce employment and investment while raising prices, and monetary authorities to reduce short-term nominal interest rates. These findings provide empirical evidence of a causal role of confidence in producing macroeconomic fluctuations. The second theme studies household fertility decisions in relation to business cycles and underlying labor market institutions. Fertility in the U.S. is shown to be procyclical with respect to current economic conditions (negative unemployment shocks) and rise in response to consumer expectation and stock price news shocks - representing expected wealth effects anticipated by households. However, fertility is shown to be countercyclical with respect to highly transitory TFP shocks – such that couples choose to have children during recessions when the opportunity cost (forgone wages) is lower, i.e. the income effect outweighs the substitution effect. Moreover, labor market institutions not directly targeting fertility are found to affect average fertility rates through their impact on business cycles. Fertility rates are negatively associated with wage rigidities (which raise employment volatility) and positively associated with employment rigidities (which instead raise wage volatility).