Heterogeneous Agent Dynamics across the Business Cycle

Brian Boyd O'Quinn

doi:https://doi.org/10.21985/N23F4F

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Heterogeneous Agent Dynamics across the Business Cycle

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This dissertation consists of two papers united by a common element: they both study the behavior of heterogeneous agents across the business cycle. In Chapter 1, I consider: what is the link between the drop in consumer credit during the Great Recession and increased unemployment? I build a heterogeneous household model with endogenous idiosyncratic risk of unemployment, incomplete insurance, sticky wages, and a central bank that follows a predetermined interest rate rule. After a shock to their credit constraints, households try to save more and thereby reduce their spending. This results in job rationing because prices are rigid. With a typical interest rate rule, I find that a tightening in credit constraints that matches the decline in consumer credit between 2008:Q2 and 2010:Q3 can explain about a 1 percentage point increase in unemployment. Without an interest rate decrease, my model exhibits a 5.36 percentage point increase in unemployment.< In Chapter 2, I address the question: what is the effect of plant entry and exit on productivity throughout the business cycle? According to Schumpeter’s theory of creative destruction, recessions should cleanse the economy of unproductive plants. I also consider the hypothesis that economic booms should force less productive plants to close due to increased competition for inputs. Using plant-level data from Chile, 1979–96, I estimate productivity using two contemporary methods and develop metrics to isolate the change in average productivity due solely to plant entry and exit. The results support both propositions. I find that entry–exit behavior during a recession improved productivity by 2.4 percentage points per year over periods of moderate economic growth. Similarly, entry–exit behavior during economic booms improved productivity by 1.9 percentage points per year over periods of moderate economic growth.

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