Essays in Macroeconomics

Public Deposited

This dissertation analyzes the decision process of firms along two dimensions which are central to the field of macroeconomics. First, we study the pricing decision of the firm in a framework where customer base matters. Surveys of managers show that the main reason why firms keep prices stable is that they are concerned about losing customers or market share. We construct a model in which firms care about the size of their customer base. Firms and customers form long-term relationships because consumers incur costs to switch sellers. In this environment, firms view customers as long-lived assets. We use a general equilibrium framework where industries and firms are buffeted by idiosyncratic marginal cost shocks. We obtain three main results. First, cost pass-through into prices is incomplete. Second, the degree of pass-through is an increasing function of the persistence of cost shocks. Third, there is a non-monotonic relationship between the size of switching costs and the rate of pass-through. In addition, we characterize the heterogenous response across industries to marginal cost shocks. The implications of our model are consistent with empirical evidence. We also show an application to the field of international economics. The second section studies the investment decision of the firm. Hayashi's (1982) model implies that the optimal investment-capital ratio depends only on Tobin's average Q. Regressions of the investment-capital ratio on average Q and cash flow find significant cash-flow and lagged investment effects. The cash-flow effect is generally interpreted as reflecting the presence of financial frictions. This interpretation is conditional on Hayashi's model being a good benchmark for the frictionless behavior of firms. We propose an alternative benchmark that we estimate using Compustat data on large firms. We find that few features are necessary to make the model consistent with firm-level data. Our model generates cash-flow and investment effects similar to those found in Compustat data even though it was not designed to so. We consider extensions to the model, including asymmetric adjustment costs and borrowing constraints, as well as the adjustment-cost specification of Christiano, Eichenbaum, and Evans (2005). These extensions do not improve the fit of the model.

Last modified
  • 07/30/2018
Date created
Resource type
Rights statement