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Three essays in macroeconomics: capital reallocation, capital utilization and optimal policy with partial information

Lanteri, Andrea (2015) Three essays in macroeconomics: capital reallocation, capital utilization and optimal policy with partial information. PhD thesis, London School of Economics and Political Science.

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This thesis is composed of three chapters. In the first chapter, I show that capital reallocation is highly procyclical, in contrast to the prediction of existing businesscycle models with firm heterogeneity, where it is highly countercyclical. I argue that endogenizing the price of used capital relative to new solves this puzzle. First I show empirically that in several sectors the price of used investment goods relative to new is procyclical. Then I build a dynamic general equilibrium model with heterogeneous firms facing both aggregate and idiosyncratic productivity shocks. Used capital is an imperfect substitute for new capital because of firm-level capital specificity. In equilibrium both the price of used capital and the volume of reallocation become procyclical. The second chapter studies the link between investment irreversibility and capital utilization. I show that when it is costly to downsize, firms respond to negative transitory profitability shocks by underutilizing their capital stock. In a partial equilibrium setting I derive both analytical and numerical results on the links between the level of irreversibility, the size and persistence of the shocks and the optimal utilization decision. In an industry-equilibrium model with heterogeneous firms and aggregate shocks, I endogenize the resale price of capital as in the first chapter and show that when this price falls, the option value of idle capital rises and the aggregate utilization rate decreases. The third chapter, co-authored with Esther Hauk and Albert Marcet, studies optimal policy in a class of models of endogenous partial information. The economy is hit by multiple shocks and the policy-maker cannot observe their realizations, but only aggregate outcomes. In general the solution to this signal extraction problem cannot be separated from the solution to the problem of finding the optimal policy and we show how to solve them jointly. We apply the result to a model of optimal fiscal policy with incomplete markets and show that the endogeneity of the signal extraction may lead to highly non-linear optimal policies.

Item Type: Thesis (PhD)
Additional Information: © 2015 Andrea Lanteri
Library of Congress subject classification: H Social Sciences > HB Economic Theory
Sets: Departments > Economics
Supervisor: Den Haan, Wouter J.

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