This dissertation consists of three essays that investigate the macroeconomic effects of resource misallocation. Chapter 1 provides an overview of this dissertation. Chapter 2 studies the macroeconomic effects of size-dependent financial frictions on capital misallocation and aggregate productivity. Based on the Chinese firm-level dataset, I find that among non-state-owned enterprises, (i) the dispersion of the marginal product of capital is significant and persistent and (ii) large firms tend to have higher leverage, and lower mean and dispersion of the marginal product of capital than their small counterparts. I analyze a dynamic stochastic general equilibrium model with heterogeneous agents and size-dependent financial frictions to match the stylized facts. I show that the economy with a size-dependent borrowing constraint can reproduce the observed negative correlation between firm size and the marginal product of capital and generate a TFP loss of 3.91%. Furthermore, ignoring firms' size-dependent financing patterns may lead to an overstatement of TFP loss due to financial frictions.

Chapter 3 studies the implications of financial development and financial reform policies on resource reallocation and aggregate productivity. I develop a general equilibrium model with heterogeneous private and state-owned firms, into which size-dependent financial frictions and equity issuance are incorporated. By calibrating the model to the Chinese economy, this chapter shows that financial reform has facilitated resource reallocation within and across the private and state sectors. The reallocation effects on the intensive margin due to reform policies account for most aggregate productivity and output gains. Besides, credit market development has played a more prominent role in promoting aggregate productivity and output than the equity market during the economic transition.

Chapter 4 investigates the impacts of factor market distortions on allocative efficiency by adopting a misallocation accounting framework with the gross output production structure and considering firm-specific distortions on capital, labor, and intermediate input. The empirical results suggest that the gross output gains by equalizing revenue productivity within sectors are 18.71% on average in the Chinese manufacturing sector. Despite the significant revenue share of gross output by intermediate input, reallocation gains from removing intermediate input distortion are smaller than that of capital and labor distortions. Although the wedge on intermediate input usage is not the primary source of misallocation, intermediate input possibly matters for the measured distortions and TFP gains.

Models that feature endogenously determined trade patterns are able to capture many features of international business cycle transmission. Although these models are "Ricardian" in the sense that countries trade labor services, changes in employment are often omitted (labor is supplied inelastically). The effect of foreign booms and recessions on domestic labor markets can therefore not be analyzed, and hence these models overlook an important mechanism of business cycle transmission across countries. Further, these models often omit capital in the production of goods. "Investment" in the model is defined as new firm construction, which does not compare well to the empirical measure of investment. This dissertation develops a two-country dynamic stochastic general equilibrium model featuring an endogenously determined trade pattern. Employment dynamics are added to the model by allowing households to choose how much labor to supply every period. The model generates high output volatility, procyclical employment and positive correlation of employment across countries. Capital is then added to the production of non-traded final goods. The model produces high international correlations of output, consumption and investment when shocks to the production of final non-traded goods are considered. Further, the model is able to reproduce high volatility of imports, exports and the exchange rate, features that past literature had difficulty capturing.

This dissertation covers several topics in macroeconomics. Chapter one provides an overview for this dissertation. Chapter two explores the role of demand shocks, as an alternative to productivity shocks, in driving both domestic and international business cycles. In addition to those well-documented domestic and international business cycle properties, this paper focuses on two additional stylized facts in the industrialized countries: procyclical trade openness (GDP fraction of trade volume) and countercyclical government size (GDP fraction of government spending). Using a parsimonious dynamic stochastic general equilibrium model, I show that the model's predictions under productivity shocks are not consistent with these facts. Instead, a demand-shock-driven model replicates the above facts while matching other business cycle properties.

Chapter three examines the long-run relationship between trade openness and government size in a two-country dynamic general equilibrium model. I analytically show that, if the non-tradable sector is more capital intensive, higher government expenditures drive up the relative capital stock in the tradable sector in steady state. This gives rise to a relatively higher output and a relatively lower price in the tradable sector. As a result, when trade openness increases, a benevolent government would expand public expenditures to push up (down) the relative output (price) of tradables so as to achieve agents' \textit{desired} consumption plan with more consumption of tradables. Therefore, a positive relationship between trade openness and government size is observed. On the contrary, if the tradable sector is more capital intensive, a negative correlation follows.

In chapter four, I present new estimates of the factor substitution elasticity and biased factor-augmenting technical progress using the supply-side system for the aggregate U.S. economy during the period 1948-2012. On the basis of recursive scheme estimations, I first show that significant variations of estimated model parameters arise from different sample periods. I next incorporate labor market friction into the supply-side system and show that the augmented model fits the data better. With labor market friction, the estimated elasticity of substitution between capital and labor does not statistically significantly differ from unity. The long-run technical progress tends to be purely labor-augmenting although non-negligible variations arise during some sample periods.

We show that in a standard, technology shock-driven one-sector real business cycle model. the stabilization effects of government fiscal policy depend crucially on how labor hours enter the household's period utility function and the associated labor-market behavior. In particular, as Gali [European Economic Review 38 (1994). 117-132] has shown. when the household utility is logarithmic in both consumption and leisure. income taxes are destabilizing and government purchases are stabilizing. However, the results are reversed when preferences are instead convex in hours worked. That is. income taxes are now; stabilizing and public spending is destabilizing. Furthermore, under both preference specifications. the magnitude of cyclical fluctuations in output remains unchanged when the income tax rate and the share of government purchases in GDP are equal (including laissez-faire). (c) 2005 Elsevier B.V. All rights reserved.

The dissertation explores the inter-dependence between agents' educational choices and their labor market outcomes. This individual level of inter-relationship is aggregated under a search and matching framework to analyze the cyclical and long-run labor market behaviors. The dissertation argues that the high volatility of labor market can be attributed to complementarity between high-skill and low-skill workers, as well as the economies of scale of job training for high-skill labor. Then, the dissertation combines a search and matching model with a signaling game to explain agents' educational choices and the unemployment rate gap between educated and uneducated workers. It also discusses some indirect effects of education and labor market policies. The effect of skill-biased technological change is scrutinized as well. An extension of this model is then used to analyze the growing mismatch of skill in China.