Friedrich LUCKE will defend his thesis on Economics on Friday 2 December, at 09:30 am Auditorium 3 JJ LAFFONT (bâtiment TSE)
Tiltle: «Essays in Macroeconomics and the Financial Cycle»
- Christian Hellwig (UT1-TSE), Président du Jury
- Patrick Fève (UT1-TSE), Directeur de thèse
- Fabrice Collard (UT1-TSM-TSE)Co-directeur de thèse
- Julien Matheron (Banque de France), rapporteur
- Céline Poilly (Université Aix-Marseille), rapporteure
This thesis is divided into three essays macroeconomics and credit markets. It puts a special emphasis on (i) the recurring nature of macroeconomic events, in particular cycles in financial markets and their effects on the real economy, (ii) cross-country interactions through credit markets, and (iii) the role that policy interventions can play at mitigating damage to the economy from crises in credit markets.
In my first chapter, I show that the defining features of the Great Moderation were a shift from output volatility to medium-term fluctuations and a shift in the origin of those fluctuations from the real to the financial sector. I establish a link between these shifts to financial market activity by showing a Granger-causal relationship by which financial cycles attenuate short-term business cycle fluctuations while they amplify longer-term fluctuations. I use these results to argue that the Great Moderation and Great Recession are two sides of the same coin. Finally, I use that a NK model combining two financial frictions and long-run risk à la Bansal and Yaron to refine the good luck and good policy hypotheses of the Great Moderation. Both hypotheses are true in the short-run but do not account for long-run risk and detrimental medium-run effects of the monetary policy.
In the second chapter, I study how capital flows between countries affect the synchronization of those countries' financial cycles. To this end, I introduce the Finance Co-movement Slope. This slope measures the effect of capital flows on financial cycle synchronization over windows of different horizons. I find that this slope is positive and increasing in the time horizon over which it is calculated, but financial synchronization is reduced the more asymmetric the capital flows are. In other words, higher capital flows increase medium-term synchronization of financial cycles by more than they increase short-term synchronization. I then show a DSGE model of cross-border capital flows that can replicate the main empirical findings. I use this model to decompose the Finance Co-movement Slope. The model suggests that in the short-run, capital flows in the market for corporate loans drive the shape of the Finance Co-movement Slope, whereas medium-run effects are driven by interbank credit flows. Finally, I show that macro-prudential policy can dampen the effects of capital flows on financial synchronization, but only in the short run.
The third chapter focuses on sovereign debt. Specifically, I study the incidence of bailouts with the possibility that bailouts may be required repeatedly before the crisis is resolved. I build a model in which a country in crisis and a rescuing country engage in a strategic interaction. In this setting, repeated bailouts are required until the country in crisis regains the trust of international creditors, which roll over its debt. Credit market re-access can be facilitated if either the country in crisis implements austerity measures, or if the rescuing country grants the country in crisis a one-off transfer of resources. The strategic interaction ends when the country in crisis has either re-accessed the international credit markets or defaulted. Evaluating the properties of the Markov-equilibrium of the model, I show how the rescuing country trades off the costs of bailout with the spillover costs from default. I find that the fundamental conflict of interest over austerity arises over the speed of repayment of the crisis country's debt. To the rescuer, austerity measures and a transfer of resources to the country in crisis are strategic complements: this is because only the implementation of austerity measures by the country in crisis ensures that the resources of the transfer do not go towards consumption, but into debt reduction.