Tuesday, 23 January, 2024

Anna Pestova: Essays in Applied Macroeconomics

Dissertation Committee:

doc. Marek Kapička, Ph.D.  (CERGE-EI, chair)

Byeongju Jeong, Ph.D. (CERGE-EI)

PhDr. Mgr. Ctirad Slavík, Ph.D. (CERGE-EI)

doc. Sergey Slobodyan, Ph.D. (CERGE-EI)

Defense Committee:

prof. Ing. Michal Kejak, M.A., CSc. (CERGE-EI, chair)

Stanislav Anatolyev, Ph.D. (CERGE-EI)

doc. Ing. Jan Čapek, Ph.D. (Masaryk University)


Michele Lenza, Ph.D. (European Central Bank and CEPR)

Burak R. Uras, Ph.D. (Williams College)

 Linko for online connection: https://call.lifesizecloud.com/20203198, passcode: 6197


This dissertation studies the role of domestic and foreign credit shocks in aggregate fluctuations and household responses to such shocks. All four essays fall under the broad range of Applied Macroeconomics.

The first chapter explores the role of credit in shaping aggregate fluctuations in a panel of advanced and emerging countries. We document that bank credit is a powerful recession predictor: following a one standard deviation increase in the bank credit growth, the risk of recession is initially reduced by 3 pp in one year but then raised by nearly 10 pp in three years. We decompose total credit by aggregate shocks and by borrower type. We establish that the overall boom-bust recession response to bank credit is due to exclusively household credit expansions, especially when these expansions are driven by shocks to aggregate demand. In contrast, corporate credit expansions exhibit no boom-bust effects and immediately increase the risk of recession, and this increase is primarily driven by credit supply shocks. We argue that credit supply shocks play a special role in business cycles because when they propagate through corporate credit, they tend to reduce aggregate productivity growth in the economy which may explain the accumulation of recession risks.

The second chapter analyzes the transmission of credit supply shocks to household balance sheets and labor market outcomes. We leverage differences in credit conditions across U.S. states  and compare household outcomes of the population residing in states which witnessed credit conditions easing of various intensities. To measure credit conditions across U.S. states, we estimate state-level vector autoregressive models and identify credit supply shocks using sign restrictions. We compare the household-level responses to two episodes of countrywide credit expansions: in 1984 and 2004. We show that positive credit shocks lead to greater household defaults in the future if they increase the household mortgage-to-income ratio. We document that positive credit supply shocks induce (i) shifts of employment between the tradable and non-tradable sectors, (ii) changes in household income and (iii) in house prices, which shape the accumulation of default risks. We conclude that credit supply-driven credit expansions of the 1980s and the 2000s are different in their effects with the latter resulting in increased defaults while the former did not.

The third chapter studies the effects of sanctions which can be thought of as a realization of a negative international credit supply shock. We use an example of financial and other sanctions imposed on Russia since 2014 and examine the effects of sanctions on key macroeconomic variables such as GDP, consumption, and investment and then explore the cross-sectional variation of those effects in the samples of firms and households. We introduce a novel approach to identify the sanctions shock---a {\it high-frequency identification} (HFI) based on the US sanction announcements and daily data on Russia's US Dollar-denominated sovereign bonds. We then use HFI-based sanctions news shock as an instrumental variable in a VAR model of the Russian economy. We show that the sanction announcements in 2014--2015 were very potent: the underlying sanctions could lead to a GDP decline of up to 3.2\%, which is twice as large as  estimated in the previous work. The effects of sanctions fall unevenly on the population and firms with the largest firms and richer population losing the most.

The fourth chapter studies a new identification of country spread shocks in emerging economies. This identification is grounded on the experience of sudden stops -- large capital reversals during crises in these countries. I start by presenting background facts about sudden stops in emerging economies. I proceed with describing the new shock identification approach which is based on sign restrictions and compare it to the existing one. I further lay down a calibrated open economy model and study if the model supports my identification. I find that the model parameter space supporting my identification is narrow and unlikely to be supported by the data. I conclude by describing alternative shock identification procedures.

Full Text: "Essays in Applied Macroeconomics"