UC Berkeley

This dissertation reflects two recent developments in the study of economics. The first concerns real world events. Beginning in 2007, the countries of Western Europe and the United States experienced a series of financial shocks and an economic downturn unprecedented in their experience since the Great Depression seventy years before. Dramatic changes in the economy raise new questions or renew old lines of inquiry. During the recession, many countries turned to discretionary fiscal stimulus packages. The size of these packages and the severity of the downturns make understanding their effectiveness of critical importance. The first chapter in this dissertation analyzes empirically the effects on employment of one particular component of the fiscal policy response in the United States. The Great Recession also renewed interest in the importance of credit to firms. The second chapter in this dissertation attempts to answer whether the withdrawal of credit following the bankruptcy filing of Lehman Brothers played a role in propagating the Great Recession.

The second development consists of the application of unit-level datasets and applied microeconomic methods to answer questions of macroeconomic importance. This research program recognizes that cross-sectional variation across individual units often exceeds the time-series variation of an aggregate. Moreover, cross-sectional studies can hold constant many macroeconomic variables that might otherwise confound the identification of a causal effect. The studies of fiscal policy and firm credit in chapters 1 and 2 apply microeconomic methods. A full answer to these questions, however, requires a correspondence between the cross-sectional analysis and the general equilibrium outcomes. In general equilibrium, spending in one geographic area may affect employment in another. Likewise, a firm not directly affected by the withdrawal of bank credit may still change its employment in response to the adjustments of other firms. One approach to the problem of general equilibrium involves building a theoretical model that nests the cross-sectional analysis as well as the general equilibrium effects. The third chapter of this dissertation demonstrates this approach in the context of the effect of the supply of credit.