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Author Roca, Mauro F
Title Incomplete financial markets and imperfect information in macroeconomics
book jacket
Descript 135 p
Note Source: Dissertation Abstracts International, Volume: 68-06, Section: A, page: 2571
Thesis (Ph.D.)--Columbia University, 2007
Chapter 1 develops a general equilibrium model with equilibrium unemployment and noncooperative wage determination to analyze the importance of incomplete markets when risk-averse agents are subject to idiosyncratic employment shocks. A version of the model calibrated to the U.S. economy shows that market incompleteness affects individual behavior and aggregate conditions. An important mechanism at work is the joint influence of imperfect insurance and risk aversion in the wage bargaining. In comparison with the complete insurance benchmark, the introduction of idiosyncratic risk reduces wages, increases vacancies and reduces unemployment. Welfare analysis shows that while with complete markets it is optimal not to provide any unemployment insurance, with incomplete markets the optimal level is positive. Solving this model is particularly challenging because ex-ante homogeneous households accumulate different levels of wealth due to different employment histories. This chapter proposes and implements a novel solution based on perturbation methods
Chapter 2 solves a real business cycle model with heterogeneous agents and uninsurable income risk using perturbation methods. A second order accurate characterization of agent's optimal decision rules is given, which renders the implications of aggregation for macroeconomic dynamics transparent. The role of cross-sectional holdings of capital in determining equilibrium dynamics can be directly assessed. Analysis discloses that an individual's optimal saving decisions are almost linear in their own capital stock giving rise to permanent income consumption behavior. This provides an explanation for the approximate aggregation properties of this model documented by Krusell and Smith (1998): the distribution of capital does not affect aggregate dynamics. While the variance-covariance properties of endogenous variables are almost entirely determined by first order dynamics, the second order dynamics, which capture properties of the wealth distribution, are nonetheless important for an individual's mean consumption and saving decisions and therefore the mean equilibrium capital stock. Policy evaluation exercises therefore need to take account of these higher order terms
Chapter 3 studies the welfare effects of varying levels of transparency in a model of price-setting under monopolistic competition and imperfect common knowledge. Our results indicate that more precise public information never leads to a reduction of welfare in this framework. We find that the beneficial effects of decreased imperfect common knowledge due to a more precise common signal always compensates the potential rise in aggregate volatility. Moreover, we show that, in contrast to what has previously been assumed, the variability of the aggregate price level has no detrimental welfare effects in this model
School code: 0054
Host Item Dissertation Abstracts International 68-06A
Subject Economics, General
Economics, Finance
Economics, Labor
Alt Author Columbia University
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