Essays on Macroeconomics
- Author(s): Llosa, Luis Gonzalo
- Advisor(s): Ohanian, Lee E
- et al.
In these essays, I examine (i) the role of terms of trade in emerging countries and (ii) economic efficiency under endogenous information. The first chapter documents a negative relationship between the terms of trade - defined as the ratio of imports to the price of exports - and various macroeconomic variables such as output, consumption, investment and total factor productivity (TFP) in emerging economies. The second part of this chapter presents a small open economy business cycles model featuring intermediate imported inputs, monopolistic competition and input-output linkages. A calibrated version of the model reproduces the empirical facts documented in the first part. In particular, the model replicates the negative link between the terms of trade and TFP, providing an explanation to a long-standing puzzle in the business cycle literature. In addition, I show how terms of trade shocks help to increase the volatility of consumption above the volatility of output. The second and third chapters, which are part of an ongoing work with Venky Venkateswaran, examine economic efficiency under costly private information. In the second chapter, my co-author and I study the efficiency of equilibrium outcomes in models where monopolistically competitive firms acquire costly information about aggregate fundamentals before making pricing or quantity decisions. Using this framework we show that market power reduces the private value of information relative to its social value, causing too little investment in learning and inefficient cyclical fluctuations. Importantly, this is true even in an environment where the ex-post response to information is socially optimal, which is the case when firms choose labor input under uncertainty about aggregate productivity. When firms set nominal prices, however, their actions exhibit a inefficiently high sensitivity to their private signals. The combination of this inefficiency in information use and market power makes the overall direction of the inefficiency in information acquisition ambiguous. In terms of policy, we show that the standard full information response to market power-related distortions can reduce welfare under endogenous uncertainty. We also show how our analysis applies to coordination games in general, using the beauty contest framework. In the third chapter my co-author and I show that the same inefficiencies characterized in the previous chapter take place in standard business cycle models. In a RBC framework with dispersed information about technology shocks, distortions due to market power have no effect on incentives to respond to information, but distort the private value of information, leading to an inefficiently low level of information acquired in equilibrium. In a monetary model with nominal price-setting by heterogeneously informed firms, inefficiencies arise in both the use and the acquisition of information.