Essays on Firms and the Macroeconomy
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Abstract
This dissertation consists of three essays on firms and the macroeconomy.Chapter 1 of my dissertation revisits a classical question in macroeconomics: what are the aggregate consequences of financial frictions? I answer the question through the lens of a dynamic quantitative general equilibrium model. Heterogeneous firms finance their investment with equity and debt and their financing decisions are distorted by two types of financial frictions: a collateral constraint and costly external equity issuance. Crucially, my model features a debt tax shield. I structurally estimate the model parameters in a simulated method of moments procedure using firm-level balance sheet data from COMPUSTAT between 1981 and 2017. I target a range of financial covariances. In particular, to identify the scope of the borrowing constraint, I use the negative association between the current investment and previous leverage. My estimation results indicate a sizable degree of financial frictions in the economy. I’m able to reproduce these empirical moments quite successfully.
In Chapter 2, I evaluate my quantified model to investigate two questions. First, what are the aggregate implications of financial frictions in the presence of the debt tax shield? Second, is there an interaction between the magnitude of tax shields and the impact of financial frictions? Previous studies indicate that removing financial frictions will stimulate investment and reduce misallocation. However, with the tax bias towards debt over equity, I show that the macroeconomic implications of financial frictions can be different. My results demonstrate that a large tax shield with loose
credit constraints can exacerbate the misallocation of capital. Using the U.S. firm-level data, my counterfactual experiments demonstrate that by removing financial frictions, aggregate capital increases by 10%, output by 3%, and welfare by 2%.
Aggregate gains can be 10 times larger when accounting for the tax shield.
Chapter 3 examines the increasing number of low-productivity firms ( “zombie firms”) by investigating the nexus of firms, banks, and the government. It is generally agreed that an efficient economy should feature a productivity-enhancing reallocation where resources are shifted to high-productivity firms and inefficient firms are scrapped. However, recent studies document opposite empirical evidence of the survival of zombie firms. The paper constructs a bank lending model with government policies on banks’ capital adequacy requirements. It demonstrates that poorly-designed policies can induce under-capitalized banks to roll over loans to otherwise inviable firms. The model generates implications that firms of different productivity would respond to a shock differently at the exit margin. This can motivate future empirical work to examine whether there are zombie firms in the economy structurally.
Description
2023
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Attribution 4.0 International