Macroeconomics

Abstract

This thesis is composed by three independent essays studying relevant topics in macroeconomic policy:

Chapter 1 analyses the interaction of monetary policy and bank risk taking. We study the effect of changes to the long-run real rate on banks' risk-taking incentives. To assess this question, we build a macroeconomic model with nominal rigidities, monetary policy, and endogenous bank risk-taking due to limited liability. Banks' access to leverage depends on their charter value, which is itself affected by movements in real interest rates. We show that permanent shifts in the long-term real interest rate have a large impact on bank leverage and on banks' investments in systemically risky assets. In contrast, transitory movements in real interest rates have a more limited impact. We find that, in the presence of systemic risk-taking, a moderate response to inflation is optimal as it sustains banks' capital during a systemic crisis. Responding strongly to inflation deviations from target reduces the volatility of inflation but leads to more bank risk-taking and more severe financial crises. Once macroprudential policy is optimally set, risk-taking is significantly reduced and price stability is once again optimal.

Chapter 2 examines the rationale for bank capital regulation in the context of the climate transition. How should capital requirements be set to deal with potentially heightened risk in the fossil energy sector? To analyse this question, we employ a general equilibrium macro-finance model featuring financial frictions, bank failure, and differentiated energy inputs in production. In the medium run, sector-specific capital requirements are welfare superior to generalized capital requirements and indirectly foster a green credit transition. The quantitative impact varies according to the economy's capacity to substitute fossil for low-carbon energy production inputs. In contrast, increasing capital requirements in the fossil banking sector to actively promote a green credit transition has detrimental effects on output and financial stability. We also perform transitional dynamics to study carbon tax scenarios in long-run horizons. When carbon taxes are coupled with an elevation in the idiosyncratic risk of the fossil banking sector, higher sectoral capital requirements contribute to a more gradual transition, mitigating bank failures and declines in consumption and output.

Chapter 3 studies the relationship between consumption insurance, transfer progressivity and economic development. Using household level data from 32 countries including the poorest and the richest in the world we document (i) a negative relationship between consumption insurance and economic development, and (ii) a negative relationship between the degree of transfer progressivity and economic development. Importantly, our measure of transfer progressivity includes both public and private net transfers across households. We build an overlapping generations model with rich heterogeneity in order to quantitatively assess the role of transfer progressivity in explaining income per capita and consumption insurance differences across stages of development. We find that cross-country differences in transfer progressivity go a long way in explaining the larger ability to insure consumption in low-income countries than in high-income countries. Considering the trade-off between economic growth and insurance, we find that moving low-income economies to their optimal transfer progressivity boosts their GDP per capita and generates net welfare gains of 18\% in consumption equivalent terms.