Essays in Macroeconomics

Abstract

This dissertation comprises three self-contained essays that investigate how micro-level frictions affect firms’ operational decisions and investors’ behavior, evaluating their respective costs or benefits for the overall economy. In the first chapter, “Customer Capital and The Aggregate Effect of Short-Termism", joint work with M. Errico and A. Lavia, we study the impact of short-termism on firms’ pricing decisions and quantify the potential costs for consumers in term of welfare. Managers face continuous pressure to meet short-term forecasts and targets, which can impact their investment in customer capital and pricing decisions. Using data on U.S. public companies together with IBES analysts’ forecasts, we find that firms that just meet analysts’ profit forecasts have average markup growth of 0.8% higher than firms that just miss targets, suggesting opportunistic markup manipulation. To assess the aggregate economic implications of short-termism, we develop and estimate a quantitative heterogeneous firm model that incorporates short-term frictions and endogenous markups resulting from customer accumulation. In the model, short-termism solves an agency conflict between manager and shareholders, resulting in higher markups and lower customer capital stock. We find that, on average, firms increase markups by 8% due to short-termism, generating $38 million of additional annual profits. At the macro level, the distortion reduces consumers’ welfare by 4% and lowers the total market capitalization by $3.1 trillion on average. In the second chapter, “Strategic Investors and Exchange Rate Dynamics", joint work with M. Errico, we study how the exchange rate dynamics are influenced by the presence of heterogeneous investors with varying degrees of price impact. Leveraging data from the U.S. Commodity Futures Trading Commission (CFTC) on investors’ currency positions, we show that foreign exchange rate markets display a significant level of concentration,and investors’ price impact is stronger in more concentrated markets. We develop a monetary model of exchange rate determination that incorporates heterogeneous investors with different degrees of price impact. We show that the presence of price impact amplifies the exchange rate’s response to non-fundamental shocks while dampening its response to fundamental shocks. As a result, investors’ price impact contributes to the disconnect of exchange rates from fundamentals and the excess volatility of exchange rates. We provide empirical evidence in line with our theoretical predictions, using data on trading volume concentration from the US CFTC foreign exchange rate market for 10 currencies spanning from 2006 to 2016. Additionally, we extend our framework to account for information heterogeneity among investors, which presents a competing dimension of heterogeneity with qualitatively similar implications for exchange rate dynamics. Both dimensions of heterogeneity are quantitatively relevant, with the heterogeneity in price impact accounting for 62% of the additional volatility and 35% of the additional disconnect attributed to investors’ heterogeneity. In the third chapter, “Firms’ Investment and Central Bank Communication: The Role of Financial Heterogeneity", I study how financial frictions impact the transmission of monetary policy to investment. Monetary policy affects firms’ capital investment through two distinct channels: the pure monetary channel, which operates through changes in interest rates, and the information channel, which operates through changes in investors’ beliefs about the economic outlook and future policy rates. I show that the role of financial frictions for monetary policy transmission hinges crucially on specific channel. Using Compustat data, I find that firms with high leverage are more sensitive to pure monetary shocks but are less sensitive to Fed information shocks. Finally, I develop a dynamic general equilibrium model with firm idiosyncratic productivity, real and financial frictions to rationalize the empirical findings and study aggregate implications.