Essays in financial economics

Abstract

This thesis consists of three chapters on financial economics: an empirical analysis of government banks, a dynamic stochastic general equilibrium (DSGE) model with financial intermediaries, and a DSGE model for capital utilization and leverage. Chapter 1 presents an empirical analysis of government banks and their effect on aggregate economic variables, such as real per capita GDP growth and GDP growth volatility. It shows that government banks are still pervasive worldwide. I perform several regressions in order to estimate the effects of government banks on the economy and whether these effects are different from those found in previous studies. I find that the effect of state-owned banks is heterogeneous and ultimately depends on how deep the financial market is and how well the political institutions function in every country. Chapter 2 introduces a new DSGE model with heterogeneous households and heterogeneous financial intermediaries: private and government banks. Using empirical evidence about the stabilization role of state-owned banks during recessions, I show that the inclusion of these intermediaries in the aggregate can improve our understanding of the reaction of certain variables, such as GDP, employment, and consumption. I show that the final effect on these variables depends on how deep the financial market is and how important the level of inefficiency in government banks is. In Chapter 3, I document, together with Diogo Duarte and Hamilton Galindo, the relationship between capital utilization and leverage. We find a positive and significant relationship between these variables, which is especially strong between capital utilization and short-run debt. Using our empirical result, we develop a DSGE model to characterize the mechanism behind this relationship. We show that omitting capital utilization as a key mechanism in the business cycle can generate misleading conclusions.