Essays on Macroeconomics
Abstract
My dissertation consists of three essays on Macroeconomics. In the first two chapters, I study the implications of uncertain expenses for households' savings and for their consumption adjustment in response to monetary policy. In the third chapter, I study how asset liquidity affects households’ ability to smooth idiosyncratic income shocks.
In the first chapter, I characterize uncertain expenses using U.S. Consumer Expenditure Survey data. Here, my goals are twofold. First, I classify households’ spending that captures uncertainties in expenses (for example, car and home repairs or out-of-pocket medical expenses) and measure their overall importance. Second, I aim to understand how households adjust expenditures in response to monetary policy. I find that uncertain expenses represent 14.5% of total expenditures for a typical household in the U.S. and display significantly larger fluctuations than other expenses. I further show that uncertain expenses drive 41.8% of households' short-run consumption adjustment in response to monetary policy.
In the second chapter, I develop a model to study the quantitative importance of uncertain expenses for households' savings, especially for portfolio choice among assets with different liquidity, and examine monetary policy implications. The model features heterogeneous agents with incomplete markets for two assets, a low-return/liquid asset (money) and a high-return/illiquid asset (bonds). Households can use these assets to self-insure idiosyncratic risk with respect to both income and expenses. Due to frictions in the goods market and in the portfolio choice problem, self-insurance against expenditure risk is a significant driver of money demand and household portfolio rebalancing explains 80% of households’ short-run adjustment in uncertain expenses in response to monetary policy. In addition, the model is consistent with the high level of concentration in the distribution of money holdings observed in the data, a feature hard to explain with traditional transaction motives for money demand.
In the third chapter, I study how asset market illiquidity affects risk-sharing among asset holders. I build a model where assets are traded subject to search and matching frictions with the transaction price determined as the solution to a bargaining problem between buyers and sellers. In addition, matching efficiency in this market endogenously determines the degree of asset illiquidity. After a loss in liquidity, the pricing mechanism derived from the bargaining problem tightens the budget constraint for sellers of the asset, who can then finance less consumption. Consequently, the consumption wedge between asset holders increases, and there is a deviation from perfect risk sharing.