| dc.description.abstract |
<p>This dissertation presents a quantitative study on the relationship between financial
intermediation and the macroeconomy of the United States. It consists of two major
chapters, with the first chapter studying adverse shocks to interbank market lending,
and with the second chapter studying a theoretical model where aggregate balance sheets
of the financial and non-financial sectors play a key role in financial intermediation
frictions.</p><p>In the first chapter, I empirically investigate a novel macroeconomic
shock: the funding liquidity shock. Funding liquidity is defined as the ability of
a (financial) institution to raise cash at short notice, with interbank market loans
being a very common source of short-term external funding. Using the "TED spread"
as a proxy of aggregate funding liquidity for the period from 1971M1 to 2009M9, I
first discover that, by using the vector-autoregression approach, an unanticipated
adverse TED shock brings significant recessionary effects: industrial production and
prices fall, and the unemployment rate rises. The contraction lasts for about twenty
months. I also recover the conventional monetary policy shock, the macro impact of
which is in line with the results of Christiano et al (1998) and Christiano et al
(2005) . I then follow the factor model approach and find that the excess returns
of small-firm portfolios are more negatively impacted by an adverse funding liquidity
shock. I also present evidence that this shock as a "risk factor" is priced in the
cross-section of equity returns. Moreover, a proposed factor model which includes
the structural funding liquidity and monetary policy shocks as factors is able to
explain the cross-sectional returns of portfolios sorted on size and book-to-market
ratio as well as the Fama and French (1993) three-factor model does. Lastly, I present
empirical evidence that funding liquidity and market liquidity mutually affect each
other.</p><p>I start the second chapter by showing that, in U.S. data, the balance
sheet health of the financial sector, as measured by its equity capital and debt level,
is a leading indicator of the balance sheet health of the nonfinancial sector. This
fact, and the apparent role of the financial sector in the recent global financial
crisis, motivate a general equilibrium macroeconomic model featuring the balance sheets
of both sectors. I estimate and study a model within the "loanable funds" framework
of Holmstrom and Tirole (1997), which introduces a double moral hazard problem in
the financial intermediation process. I find that financial frictions modeled within
this framework give rise to a shock transmission mechanism quantitatively different
from the one that arises with the conventional modeling assumption, in New Keynesian
business cycle models, of convex investment adjustment costs. Financial equity capital
plays an important role in determining the depth and persistence of declines in output
and investment due to negative shocks to the economy. Moreover, I find that shocks
to the financial intermediation process cause persistent recessions, and that these
shocks explain a significant portion of the variation in investment. The estimated
model is also able to replicate some aspects of the cross-correlation structure of
the balance sheet variables of the two sectors.</p>
|
|
