Three Essays in Macroeconomics

Maggi, Chiara

doi:https://doi.org/10.21985/n2-t9f2-cq36

Work

Three Essays in Macroeconomics

Public

Download PDF

In this dissertation, I cover three different topics in macroeconomics. In Chapter 1, I explore the macroeconomic implications of an increase in business competition and its micro transmission channels. In Chapter 2, I document a rise in savings and cash holdings by non-financial corporations across advanced economies and show that it is mostly driven by a rise in firm profits. Finally, in Chapter 3, I present a theoretical model in international macroeconomics on the effects of a currency appreciation, allowing the appreciation to be driven by different motives. In the project presented in Chapter 1, which is coauthored with Sonia Felix, we provide novel empirical evidence on the response of firms’ entry, employment, and exit behavior to a reduction in entry costs for firm. To do so, we use as a natural experiment a reform in Portugal that significantly reduced entry time and costs. We find that the reform had an expansionary impact: firm entry and employment increased by 25% and 4% per year in the first four years of implementation. Moreover, around 60% of the increase in employment came from incumbent firms expanding their size, with most of the rise occurring among the firms that were the most productive before the reform. Standard models of entry, exit, and firm dynamics, which assume a constant elasticity of substitution, are inconsistent with our findings about the heterogeneous response of incumbents to the reform. We show that a model with heterogeneous firms and variable markups accounts for our evidence. In this framework, the most productive firms face a lower demand elasticity and increase their employment in response to the entry of new firms. In Chapter 2, which is coauthored with Chi Mai Dao, we use cross-country national accounts to document rising trends in gross saving and net lending of non-financial corporations across major industrialized countries over the last two decades. We find that this trend holds consistently across major industries, and is driven by rising profitability, lower financing costs, and reduced tax rates. At the same time, higher gross corporate saving have not supported a commensurate increase in fixed capital investment, but instead led to a build- up of liquid financial assets (cash). Using firm-level data we find that the determinants of corporate cash holding and net lending position are also broad-based across countries. In particular, we find that the bulk of the increase in savings and cash is coming from assets growth of large firms, highly intensive in R&D expenditure, and with a high share of foreign sales. In Chapter 3, which is coauthored with Gideon Bornstein, we study the consequences of a currency appreciation on the economy, allowing a given exchange rate shock to be driven by different motives. We explicitly distinguish between demand-driven and bond- driven appreciations. An appreciation under the first scenario is due to an increase in foreign demand for domestic goods, whereas in the second case it is the consequence of an increase in demand for domestic bonds, usually justified by a “flight-to-safety” motive. I rationalize those two motives in a frictionless model with a tradable and a non-tradable sector. The model implies that a demand-driven appreciation is accompanied by a current account surplus, reallocation of labor towards the tradable sector, a rise in wages and a fall in consumption, while the opposite is true for a bond-driven appreciation. We then evaluate the impact on welfare of the different shocks. We find that a demand-driven appreciation increases welfare, while a bond driven appreciation has no impact on welfare to a first order. The predictions for demand-driven shocks are then tested empirically on Canada, while Switzerland is chosen for the bond-driven appreciation. Finally, we introduce downward wage rigidity. We find that, in this case, a bond-driven appreciation increases unemployment and has a negative impact on output and welfare.

Creator