Essays on Financial Frictions and Business Cycles
Bravo Tamayo, Jorge Salvador
The first chapter proposes a general equilibrium model with two interrelated costly-state verification frictions à la Bernanke, Gertler and Gilchrist (1999). First between entrepreneurs and the financial sector. Second, between the financial sector and a money market for short term debt. The model generates endogenous spreads between financial intermediaries borrowing costs and the risk free rate, and between the borrowing costs of financial intermediaries and entrepreneurs. The net worth of the domestic financial sectors, as well as the net worth of entrepreneurs, matter for the model's dynamics.Chapter two extends the model to study the business cycles of emerging economies and the role of domestic financial sector as determinant of their country spreads. This chapter documents for a small open economy that the country-spread has real effects on its macroeconomic fluctuations. Besides, even though there is a global risk component in the country-spread that should be considered exogenous to internal conditions, the evidence supports the fact that positive economic domestic conditions affect it negatively. This countercyclical behavior suggests that the country-spread exacerbates the business cycles in emerging economies. Considering this evidence, the chapter proposes a quantitative real business cycle model for emerging economies based on a variant of the financial accelerator model of Bernanke, Gertler and Gilchrist (1999). The model is an augmented small open economy model where both domestic and country spreads emerge endogenously. In equilibrium the spreads are determined by the default risk of both non-financial and financial sectors. The quantitative results show that shocks to the latter are more important than shocks to the former to explain the country-spread.Chapter three studies cross-sectional differences in price-setting response of commercial banks to changes in monetary policy in the context of the bank lending channel view. Using an extensive dataset of all commercial banks operating in Chile in the period 2007-2012, this chapter analyzes whether the banking rate pass-through to changes in monetary policy rate is different in uncertain times compared to normal times. The results suggest that heterogeneity plays a key role in the interest rates pass through in Chile, both in normal and uncertain times. After a monetary tightening, depending on their capital ratio and deposits strength position, some commercial banks overreact in the short-run increasing their lending interest rates beyond than the average bank does. This evidence supports the quantitative results presented in chapter two which show that the net worth of the financial sector plays a key role in its cost of funds, and consequently in the lending interest rates in the economy.
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