Essays on Macroeconomics

Cugat, Gabriela Mariel

doi:https://doi.org/10.21985/n2-czap-5q16

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Essays on Macroeconomics

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This dissertation explores two topics in macroeconomics related to aggregation assumptions and microfoundations. Chapters 1 and 2 focus on the representative agent aggregation assumption in the context of open economies, using both an empirical as well as a theoretical approach. Chapter 3 on the other hand, deals with the microfoundations of using money and transacting in the informal sector, and how the government decides its optimal policy in this context. In Chapter 1, I document the importance of sector work in the aftermath of a sudden stop. Using Mexico's 1995 crisis as a case study, I first document empirically that working in the tradable versus non-tradable sector is a crucial determinant of the income and consumption losses of different types of households. Specifically, households in the non-tradable sector suffered much larger income and consumption losses, regardless of other household characteristics. In Chapter 2, I argue that household heterogeneity plays a key role in the transmission of aggregate shocks in emerging market economies. To account for the effect of the empirical observation from Chapter 1 on macroeconomic dynamics, I construct a New Keynesian small open economy model with household heterogeneity along two dimensions: uninsurable sector-specific income and limited financial-market participation. I find that the propagation of shocks in this economy is affected by both dimensions of heterogeneity, with uninsurable sector-specific income playing a quantitatively larger role. In terms of policy, a managed exchange rate policy is more costly overall when households are heterogeneous; however, households in the non-tradable sector benefit from it. In Chapter 3, I study optimal policy in a monetary economy in which the government only has access to distorting taxes and there are some non-taxable transactions. In this environment, the Friedman rule (deflate at the rate of time preference) is not optimal. In fact, inflation is increasing with the size of the underground economy when buyers are randomly assigned to each market. When consumers can freely choose whether to evade taxes, the government needs to balance the revenue generating motive of its instruments with the distortions they generate in terms of both the intensive and extensive margins of economic activity. The magnitude of the distortions and the strength of the instruments in terms of revenue generation depend greatly on the parameters of the matching function, which determines how easy it is to transact in each market, so that both instruments might be increasing or decreasing with the size of the underground economy.

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