Essays on monetary policy and financial markets in heterogeneous economies
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Abstract
This dissertation investigates three major macroeconomic events, the Dot-com Bubble (late 1990s-2000), the Great Financial Crisis (2007-2008), and the COVID-19 Pandemic (2019-2020), through novel analytical channels, with a particular emphasis on heterogeneity at the household, firm, and sector levels. Across three interconnected chapters, it examines how distributional effects, information asymmetries, and financial frictions influence the transmission and effects of economic shocks. Each chapter contributes to a deeper understanding of macroeconomic dynamics by developing theoretical frameworks and conducting quantitative analyses to uncover key propagation mechanisms and inform policy implications. Chapter 1: Quantitative Easing with Heterogeneous PortfoliosQuantitative Easing (QE) has been extensively employed as an unconventional monetary policy tool to stabilize financial markets and stimulate economic activity. Notably, quantitative easing re-emerged as a key policy tool during the COVID-19 pandemic. However, its effectiveness and distributional consequences hinge critically on the heterogeneity of household portfolios. This chapter develops a macroeconomic model in which households differ in their asset holdings. By incorporating these differences, the analysis examines how wealth redistribution may amplify or dampen QE-induced asset price movements, and how such redistribution influences aggregate consumption and investment.
Chapter 2: Credit Shocks in a Two-Sector Economy with Leverage Heterogeneity
This chapter focuses on the macroeconomic implications of credit-supply-side financial shocks, particularly how disruptions in banks' balance sheets propagate through the broader economy. While much of the literature has emphasized credit-demand shocks, this study shifts the focus to the supply side, where financial intermediaries face constraints that limit their lending capacity. Extending the Gertler and Karadi (2011) framework, the chapter introduces a DSGE model with two sectors, aiming to capture core mechanisms behind the Great Recession. A key contribution is the analysis of how shocks originating in one sector, such as the housing sector, can transmit to other sectors through the banking system, as banks reallocate or reduce credit in response to changing risk and regulatory conditions. The model highlights how leverage heterogeneity and intersectoral linkages via financial intermediaries can amplify the macroeconomic effects of financial disruptions, offering insights into the sectoral dynamics observed during the Great Recession.
Chapter 3: Stock Overpricing, Managerial Incentives and Firm Investment: A Step Toward Firm-Level Heterogeneity
This chapter examines how managerial compensation structures and market sentiment jointly influence managerial behavior and firm-level investment decisions. Drawing on insights from behavioral and corporate finance, it develops a theoretical framework in which managers, motivated by stock-based compensation and attentive to market expectations, may respond to over-optimistic valuations by increasing investment, even in projects with weak fundamentals, in an effort to signal firm quality. The analysis highlights how information frictions and market sentiment can lead to investment distortions when market valuations deviate from intrinsic value. This framework lays the groundwork for studying firm-level heterogeneity and its role in aggregate misallocation. It also provides a lens through which to interpret episodes of "irrational exuberance," such as the dot-com bubble, and offers tools for quantifying their broader macroeconomic effects. Collectively, the three chapters explore key economic events and emphasize a central insight: heterogeneity plays a crucial role. By incorporating portfolio, sectoral, and firm-level differences into macroeconomic analysis, this dissertation offers new perspectives on policy transmission, financial stability, and the design of interventions that are both effective and equitable.
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2025