Essays in macroeconomics : information and financial markets

Abstract

This thesis studies how information imperfections affect financial markets and the macroeconomy. Chapter 1 considers an economy where investors delegate their investment decisions to financial institutions that choose across multiple investment opportunities featuring different levels of idiosyncratic risk and different degrees of correlation with the aggregate of the economy. Investors solve an optimal contracting problem to induce financial institutions to allocate their investment optimally. We then study how investment decisions are affected when financial securities are introduced that allow agents to trade their risks. Investors do not have the necessary information to understand these securities, but give incentives to financial institutions to hedge certain risks. We show that hedging idiosyncratic risks ameliorates the agency problem between investors and financial institutions and reduces aggregate volatility. On the contrary, when aggregate risk can be hedged the agency problem worsens and aggregate volatility increases. Finally, we study the efficiency properties of the equilibrium and the potential role for financial regulation. Chapter 2 studies the welfare effects of the information contained in macroeconomic statistics, central-bank communications, or news in the media? We address this question in a business-cycle framework that nests the neoclassical core of modem DSGE models. Earlier lessons that were based on "beauty contests" (Morris and Shin, 2002) are found to be inapplicable. Instead, the social value of information is shown to hinge on essentially the same conditions as the optimality of output stabilization policies. More precise information is unambiguously welfare-improving as long as the business cycle is driven primarily by technology and preference shocks-but can be detrimental when shocks to markups and wedges cause sufficient volatility in "output gaps". Finally, chapter 3 studies how market signals-such as stock prices-can help alleviate the severity of the asymmetric information problem in credit and liquidity management. Asymmetric information hinders the ability of borrowers (firms, investment banks, etc) to undertake profitable investment opportunities and to insure themselves against liquidity shocks. On the equilibrium path, creditors need not learn anything from market signals because they can use a menu of contracts to screen the different types of borrowers. Nevertheless, by conditioning liquidity insurance on ex post price signals, creditors are able to provide the borrowers with better incentives for truth-telling. At the same time, prices depend on the liquidity that creditors offer to the borrowers. This two-way feedback impacts the design of the optimal contract and potentially generates multiple equilibria in financial markets.