Essays on Macroeconomics and Trade

Montag, Hugh

doi:https://doi.org/10.21985/n2-f98h-hk89

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Essays on Macroeconomics and Trade

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This thesis contains three chapters studying macroeconomics and trade. The chapters are organized into two topics: inflation expectations and perceptions, and the effect of trade intermediation on economic activity. In the first chapter, I investigate whether households are significantly harmed by inaccurate beliefs about inflation. The chapter analyzes two established inflation perceptions biases and evaluates their welfare effects. The first bias is the frequency bias, where households overweight goods that they purchase frequently but are a small share of their consumption basket. In my French sample, I find that households fixate on bread prices. The second bias is that households consistently overestimate the current inflation rate, which I call the level bias. I estimate the magnitude of these biases using a confidential French household survey. In order to evaluate the welfare losses of the two biases, I incorporate biased inflation perceptions into a partial-equilibrium model where households save in a single nominal bond subject to inflation risk. The level bias significantly reduces welfare and asset accumulation, while the frequency bias has negligible effects, despite the fact that both biases are prominent in my survey data. I also show that if households have biases in both perceptions and expectations, removing only the perception bias can reduce welfare further. The second chapter studies the effect of erroneous inflation expectations and perceptions on the interest rate. I find that the passthrough to the nominal interest rate is less than one-for-one, such that the households perceive that the real interest rate has fallen. Additionally, I find that wealth inequality rises if households have the level bias, even though the beliefs are homogeneous. Biased inflation expectations raises the nominal interest rate, while biased inflation perceptions lowers it. In the third chapter of this dissertation, joint with Heyu Xiong, we study the significance of spatial frictions in determining the density and distribution of economic activities. We develop and study an economic geography model related to the existence of entrepôts, locations which intermediate trade between pairs of other locations. Entrepôt locations receive a second sector of income due to interchange, attracting more labor and economic activity. We use discontinuities in transportation induced by railroad gauge breaks in 19th century U.S. as an example of this phenomenon. Reduced form evidence indicates that counties containing rail-gauges received a substantial exogenous stimulus. We build a quantitative spatial general equilibrium model to disentangle the effects of entrepôt activity on its local economy as well as to evaluate its general equilibrium consequences.

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