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Essays on the effects of debt on real activity
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Asbool, Ghasan Saeed (2019) Essays on the effects of debt on real activity. PhD thesis, University of Warwick.
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Official URL: http://webcat.warwick.ac.uk/record=b3479472~S15
Abstract
This thesis consists of two chapters and a dataset made available for future research. Chapter 1 aims to explain two economic observations. First, firms of different sizes face different credit treatments by banks. There is a heterogeneous credit treatment to firms with different sizes but share the same production technology; where size is defined by firms’ net worth (precisely, the amount of capital they own). I present a micro founded macroeconomic model, where lenders in their attempt to maximise their profits, will decide whether to pay high audit costs or not when extending credit to firms. Using audit reveals firms’ idiosyncratic shocks that are otherwise unobservable before engaging in production. The lenders’ optimisation will generate an endogenous audit threshold for the level of capital, k, that implies different credit treatment for firms that fall below the threshold level, compared to the ones that fall above it. Second, during the financial crisis, firms’ investments have differed nonuniformly; where medium-sized firms exhibited the largest percentage decline in investment. Using the said model, I discuss how differing credit treatments and shifts in k can lead to differing average investment responses to economic shocks by firms based on their size. The model predictions are qualitatively consistent with the UK data. Although there are other factors that may have caused such empirical regularities to arise, what I am presenting is one of the channels, namely financial frictions, through which the given phenomena can be explained.
The second chapter investigates the issue of the economy wide stagnating labour productivity in the UK since 2008. Most of the theoretical literature that ties financial frictions with productivity, address the issue from the angle of resources misallocation whether it is labour or capital. However, most of the decline in UK’s labour productivity occurred within firm, rather than through depressed external restructuring. Accordingly, my theoretical explanation seeks to tie shocks to the financial sector with production changes within firms. The results are achieved by a version of the real business cycle model, which incorporates wealth shocks and redistributive wealth taxes that affect wealth inequality. The shocks in the model cause changes in relative factors’ prices during the recession and the following recovery, leading to capital shallowing within firms. The model’s theoretical predictions are qualitatively consistent with the movements in real variables and prices that occurred in the UK since the financial crisis.
Finally, the dataset facilitates future research on how public debt decomposition between domestic and external creditors, affects the size of fiscal multipliers. Following the decisive bail out measures, many governments have embarked on fiscal consolidation plans, to bring their finances back into control. However, economic growth has fallen short from what has been expected, when the fiscal consolidation plans were introduced. Accordingly, it became clear that fiscal multipliers were substantially higher than previously assumed. In the years leading to the financial crisis, some of the small European countries have witnessed a steady and substantial increases in the percentage of non-resident holders of their public debt. This may have reduced the crowding out effect of government spending. This chapter presents an update of the dataset of Ilzetzki, et al. (2013). It consists of 50 countries and expands on the previous dataset by including decomposition of debt data between domestic and foreign holders using multiple sources.
Item Type: | Thesis (PhD) | ||||
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Subjects: | H Social Sciences > HB Economic Theory H Social Sciences > HC Economic History and Conditions H Social Sciences > HG Finance |
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Library of Congress Subject Headings (LCSH): | Business cycles, Labor productivity -- Great Britain, Recessions -- Great Britain, Small business -- Finance, Commercial loans, Bank loans | ||||
Official Date: | September 2019 | ||||
Dates: |
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Institution: | University of Warwick | ||||
Theses Department: | Department of Economics | ||||
Thesis Type: | PhD | ||||
Publication Status: | Unpublished | ||||
Supervisor(s)/Advisor: | Polemarchakis, Herakles ; Chen, Natalie | ||||
Format of File: | |||||
Extent: | xiii, 199 leaves : graphs, charts. | ||||
Language: | eng |
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