Firm-level frictions in macroeconomics
Altinoglu, Engin Levent
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This dissertation consists of three essays on firm-level frictions and their aggregate implications. The first two chapters show that inter-firm lending plays an important role in business cycle fluctuations. In Chapter I, I theoretically investigate the role of supplier credit relationships in propagating and amplifying small shocks using a stylized model of inter-firm trade and lending. I build a network model of the economy in which trade in intermediate goods is financed by supplier credit. In the model, a financial shock to one firm affects its ability to make payments to its suppliers. The credit linkages between firms then transmit financial shocks across firms, amplifying their effects on aggregate output. In Chapter II, I embed this mechanism into a more general macroeconomic framework to study empirically the role that inter-firm credit plays in the business cycle. To calibrate the model, I construct a proxy of inter-industry credit flows from firm- and industry-level data. I find that the credit network of the US accounts for 22 percent of the fall in GDP occurring from an aggregate financial shock. Finally, I use a structural factor approach to estimate the shocks which affected US industrial production (IP) industries from 1997-2013. I find that most aggregate volatility in IP was driven by aggregate liquidity shocks and idiosyncratic productivity shocks, and that the credit network of IP industries generated 17 percent of observed aggregate volatility. During the recent recession, three-quarters of the drop in aggregate IP was due to an aggregate financial shock. Chapter III presents a theoretical investigation of the long-run relationship between international trade and unemployment. I develop and analyze a static general equilibrium model with labor market frictions and heterogeneous firms in which firms can engage in cross-border hiring by employing labor domestically or from abroad. This chapter outlines the conditions on the model parameters under which unemployment rises or falls after trade liberalization, and demonstrates that models in the literature which ignore cross-border hiring likely underestimate the upward force of trade liberalization on unemployment.