This dissertation focuses on two topics: macroeconomic implications of consumer inertia, and sovereign debt. In Chapter 1, I explore the role of consumer inertia---persistence in households' consumption choices---as a driver of the rise in corporate profits and decline in the share of young firms in the US economy during the past three decades. In Chapter 2, I develop a model of sovereign debt in continuous time which advances the capabilities of discrete-time sovereign debt models. Finally, Chapter 3 studies the sovereign debt crisis in Europe and presents a model which is consistent with the evidence. Over the past thirty years, the share of young firms in the US has declined while the share of profits in GDP has increased. The first chapter of the dissertation explores the role of consumer inertia as a driver of these twin phenomena. The hypothesis is that more consumer inertia makes it more difficult for entrants to establish a customer base and incentivizes large incumbents to raise markups. First, I use detailed micro data to document that consumer inertia has increased over time due to the aging of the US population. Second, I show that there is a negative relation between consumer inertia and firm formation using empirical evidence across product categories and across US states. Finally, I develop a model of entry, exit, and firm dynamics with consumer inertia. I calibrate the model using my micro estimates of consumer inertia and data on firm dynamics. According to the model, the rise in consumer inertia accounts for a substantial proportion of the twin phenomena. In the second chapter, I construct a continuous time model of strategic default and provide a numerical algorithm that solves it. I compare the results and computation times to standard discrete time models of sovereign debt. The method proposed here is faster than discrete time computation methods while obtaining similar quantitative results. The few differences between the models can all be attributed to a feature in continuous time that is absent in discrete time, costly deleveraging. I solve three variants of the model. The first includes short term maturity bonds only and a constant risk-free interest rate. The second allows for stochastic fluctuations in the risk-free rate. In the final part of the chapter, I extend the model to allow for long term maturity bonds. A large literature has developed quantitative versions of the Eaton-Gersovitz model to analyze default episodes on external debt. In Chapter 3, I study whether the same framework can be applied to the analysis of debt crises in which domestic public debt plays a prominent role. I consider a model where a government can issue debt to both domestic and foreign investors, and derive conditions under which their sum is the relevant state variable for default incentives. I then apply the framework to the European debt crisis. I show that matching the cyclicality of public debt---rather than that of external debt---allows the model to better capture the empirical distribution of interest rate spreads and gives rise to more realistic crises dynamics.

Creator

• Bornstein, Gideon

DOI

• https://doi.org/10.21985/n2-1yyn-cz29

Subject

• Economics

Language

• en

Alternate Identifier

• etdadmin_upload_647981
• http://dissertations.umi.com/northwestern:14553

Date created

• 2019-01-01

Resource type

• Dissertation

Rights statement

• In Copyright