Essays in macroeconomics

Abstract

This dissertation consists of three essays. The first one studies the effect of labor policy, in particular of firing costs, on financially restricted firms. It proposes and models an effect of firing costs that has not been described in the literature so far. When a time gap exists between production and its associated revenues, firing can become a liquidity adjustment tool that allows firms to increase their short-term liquidity. The presence of firing costs reduces the ability of firms to use this tool. This reduction negatively affects the optimal levels of investment and production of financially restricted firms. I present empirical evidence in line with this effect. The second essay studies the empirical relationship between aggregate macroeconomic volatility and idiosyncratic firm-level volatility. This relationship is a testable implication of a rich set of theoretical models available in the literature. I propose a consistent estimator of the variance of firms' real sales growth rate (proxy for idiosyncratic volatility) based on the cross-sectional properties of firms' distribution. I use optimal structural break tests and long-run relationship tests to study the relationship between aggregate and idiosyncratic firm-level volatility. The main empirical results suggest a negative and significant long-run relationship.

(cont.) The third essay, coauthored with Norman Loayza, analyzes potential monetary and fiscal policy biases that could result from the interaction between fiscal and monetary authorities-in a macro-policy environment where the monetary authority is committed to independently controlling inflation. We show that an increase in the divergence of authorities' preferences, with respect to the short-run trade-off between output and inflation gap, could lead to higher fiscal deficits and higher interest rates. We use a game-theoretic model to analyze this interaction, and we present supporting empirical evidence based on a panel data estimation for industrial countries.