Credit and Finance in the Macroeconomy

Abstract: Agency Costs, Net Worth and Endogenous Business Fluctuations. This essay proposes a theory of endogenous business fluctuations. A central tenet of the theory is that investment decisions depend upon entrepreneurs' incentive to exert effort and investors' incentive to control entrepreneurs. This double-sided incentive is used to show how recessions prevent entrepreneurs from engaging in unproductive activity and booms facilitate the adoption of unproductive arrangements, so that recessions may sow the seeds for a subsequent boom while economic expansions may create the conditions for their own demise.Imperfect Information and Housing Price Dynamics. This essay develops a theory of house price dynamics in a model where agents are imperfectly informed about the nature of disturbances to their income. Relative to the benchmark case of perfect information, information heterogeneity increases the sensitivity of house prices to individual income shocks. If household decisions are based on the expectation of other households' expectations, higher order expectations tend to reduce the discrepancy of house prices from their perfect information value.Reconsidering the Role of Money for Output, Prices and Interest Rates. New Keynesian models of monetary policy predict no role for monetary aggregates. This essay evaluates the empirical validity of this prediction by studying the effects of shocks to monetary aggregates using a VAR. Shocks to monetary aggregates are identified by the restrictions suggested by New Keynesian monetary models. Contrary to the theoretical predictions, shocks to broad monetary aggregates have substantial and persistent effects on output and prices.An Empirical Reassessment of the Relationship between Finance and Growth. This essay re-examines the empirical relationship between financial development and economic growth. It presents evidence based on a variety of econometric methods and standard measures of financial development. There are two main findings. First, in contrast with the recent evidence, cross section and panel data instrumental variables regressions reveal that financial development does not cause economic growth. Second, using a procedure designed to estimate long-run relationships in a panel with heterogeneous slope coefficients, there is no clear indication that finance spurs economic growth.