Essays in Macroeconomics
This dissertation consists of two essays in macroeconomics. In the first essay, I explain the increase in the interbank market credit spreads during the recent financial crisis using a model with endogenous default, in which banks with different default risk borrow at different interest rates. I compare a normal times stationary equilibrium and a crisis times stationary equilibrium. In normal times there is no spread in the interbank market, because the default probability of banks is zero. In crisis times some banks default, and an interbank credit spread arises endogenously. The interbank credit spread is positively correlated with leverage and debt size, and negatively correlated with expected cash flows. Using this framework, I study the effects of equity injections, debt guarantees, and liquidity injections on the interbank credit spreads and on risky projects financed by banks. I find that debt guarantees are effective in reducing interbank credit spreads in times of crisis, but not in stimulating investment. In contrast, interbank credit spreads are relatively unresponsive to injections of equity and of liquidity; however, these policies are successful in stimulating investment.
In the second essay, I study the capacity of the Taylor principle to guarantee determinacy in the class of New Keynesian models typically used for monetary policy analysis, when firms are not able to index their prices. In a model with labor, capital accumulation, capital adjustment costs, and capital utilization, the necessary conditions for trend inflation to affect determinacy are as follows: trend inflation is above 4%, firms are not able to index their prices, and the frequency of price changes is less than once a year. Introducing sticky wages, it is possible to find a response to inflation greater or equal than one that guarantees determinacy; however, the determinacy region is small and indeterminacy can arise even when the response to inflation is higher than one for one.
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