Expropriation Risk and Aggregate Productivity with Heterogeneous Firms (job market paper)

In this paper, I propose a general equilibrium model featuring heterogeneous firms and a government that is both unable to commit and relatively more impatient than firms. I find that, as predicted by theoretical papers on limited commitment, the threat of expropriation alone is enough to distort capital accumulation. Moreover, I show that the fact that the government is more impatient than firms induces additional growth dynamics by determining that distortions to capital do not completely go away once the long run stationary equilibrium has been reached. This is because the relative impatience of the government leads not only to decreases in promised utility by the firm when constraints do not bind, but also makes it very costly for a firm to increase its promised utility and capital when a constraint binds. Thus, promised utility will not increase as much as in the case where government and firms discount at the same rate, resulting in a stationary equilibrium level of capital that is less than optimal. Finally, when embedding the contracting problem between a firm and the government in a GE model with heterogeneous firms, I find that expropriation risk is capable of endogenously generating misallocation of resources across firms, with more productive firms being affected the most by the contracting frictions, thus leading to losses in aggregate output and total factor productivity in the long run stationary equilibrium.

Re-examining the role of financial constraints in business cycles: is something wrong with the credit multiplier? with Jessica Roldan (UCLA)

A large theoretical literature suggests that financial frictions provide a mechanism which amplifies and propagates macroeconomic shocks. However, quantitative papers that embed this mechanism, referred to as the credit multiplier, into standard DSGE models conclude that although credit constraints delay the velocity at which productivity shocks propagate into the economy, they have no significant amplification effects, with the exception of special cases. Motivated by these results, in this paper we re-examine the quantitative role of financial frictions in business cycles to address the following question: is there something wrong with the credit multiplier? Our answer is no. In coming to this answer, we work with a model with reproducible capital and collateral constraints within two setups, a general and a partial equilibrium. Our results from the first model in terms of propagation and amplification do not differ from previous papers. However, our main finding is that it is not the credit multiplier what fails in this type of models, but rather their ability to produce sufficient variability in prices. In particular, in a model with reproducible capital, general equilibrium dynamics counteract the logic of price fluctuations described by theoretical models, thus preventing the credit multiplier from being triggered. The partial equilibrium setup allows us to confirm our previous claim: absent the general equilibrium effects, the credit multiplier is indeed an effective amplifying mechanism of shocks into the economy.