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Essays on frictions in financial macroeconomics


Building on Flavin and Nakagawa (2008), chapter one models household optimal consumption and portfolio selection when consumption services are generated by both housing and non -housing consumption. Housing is illiquid in that a non- convex adjustment cost must be paid when it is sold. It is shown that optimal consumption of housing is not a constant fraction of wealth but instead depends on the ratio of wealth to housing and the price of housing. Households adjust housing infrequently, waiting for large wealth changes before adjustment. As in models without this adjustment cost, households adjust non-housing consumption each period. Unlike in frictionless models, non-housing consumption is not a constant fraction of wealth. For particular parameters of the utility function and asset markets drawn from the literature, model simulations match aggregate consumption dynamics better than alternative frictionless models, even those with homes as assets. The simulations also predict differing responses of households with different fractions of their wealth in housing. In chapter two, stock market makers are afraid that informed insiders will take advantage of them in trade. To protect themselves, they may increase the bid -offer spread to include a fee for the adverse selection risk . If set correctly, market makers will share in profits from others trading on private information and can distribute the remaining costs among other market participants. If market makers protect themselves this way, then when the risk of informed trading is relatively low, the bid-offer spread should decline. The risk of informed trading will be relatively low when the difference in public and private information shrinks. Filings with the Securities and Exchange Commission (SEC) and conference calls where corporate earnings are announced and discussed should be events that diminish this difference. Because smaller companies attract less scrutiny, they may experience relatively larger changes in this information distance after these releases. This paper finds weak evidence that spreads diminish when this information is released and a weak size effect. It hypothesizes that the bid-offer spread seems to be unresponsive to information and company size because the adverse selection component of the spread is smaller than has previously been estimated does or possibly does not exist. Estimates of this spread are actually a statistical illusion created by the structural form of earlier estimation techniques. The recent global financial crisis suggests the post-1984 Great Moderation has come to an abrupt end. How we obtained nearly 25 years of stability and why it ended are ongoing puzzles. Chapter three depart from traditional monetary policy explanations and consider two empirical regularities in US employment : i) the decline in the procyclicality of labor productivity with respect to output and labor input and ii) the increase in the volatility of labor input relative to output. We first consider whether these stylized facts are robust to statistical methodology. We find that the widely reported decline in the procyclicality of labor productivity with respect to output is fragile. Using a new international data set on total hours constructed by Ohanina and Raffo (2011) we then consider whether these moments are stylized facts of the global Great Moderation. We document significant international heterogeneity. We then investigate whether the role of labor market frictions in the US as found in Galí and van Rens (2010) can explain the international results. We conclude that their stylized model does not appear to account for the differences with the US experience and suggest a direction for future research

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