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<p>During 2007-2009 the U.S. economy experienced the most severe financial crisis
since the Great Depression. Why did the financial crisis turn into such a severe recession?
And what were the causes of the Great Recession? This dissertation consists of two
essays examining these questions. In the first essay I study the extent to which the
increase in uncertainty might have contributed to the severity of the crisis. The
second essay examines the reasons behind the fall in the personal saving rate as measured
in the National Income and Product Accounts.</p><p>In the first essay I study the
effects of changes in uncertainty on optimal financing and investment in a dynamic
firm financing model in which firms have access to complete markets subject to collateral
constraints. Entrepreneurs finance projects with their net worth and by issuing state-contingent
securities, which have to be collateralized with physical capital. An increase in
uncertainty leads to deleveraging, as entrepreneurs reduce their demand for external
financing and fund a larger share of their investment from net worth. Upon an increase
in uncertainty, investment initially falls as entrepreneurs decrease the scale of
their projects. Investment recovers as entrepreneurs build up net worth and transition
into an environment with high uncertainty. Quantitatively, changes in uncertainty
have large effects on optimal leverage and investment dynamics.</p><p>The spendthrift
nature of U.S. households leading up to the financial crisis has been cited as a major
contributing factor for the Great Recession. Indeed, the personal saving rate has
been falling since the end of the 1970s, dropping to as low as nearly 1 percent before
the financial crisis. The reasons behind the decline in the personal saving rate have
yet to be understood, and thus constituting an important puzzle for economic research.
In the second essay, joint work with Maurizio Mazzocco, we provide a potential explanation
for the decline in the personal saving rate. Specifically, we show that a single variable
can potentially explain the decline in the U.S. personal saving rate from 10 percent
in the early eighties to nearly 1 percent in 2007. This variable is medical expenditure
by health institutions net of the employers' contributions to pension and insurance
funds. Furthermore, if we differentiate between contributions to pension funds and
to health plans, we find that the main reason behind the dramatic reduction in the
U.S. personal saving rate is the stagnation of employers' contributions to pension
funds that started in the early eighties combined with the sharp rise in expenditure
by health institutions.</p>
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