Essays on Financial Macroeconomics

Debt plays a crucial role in shaping macroeconomic dynamics, with borrowing constraints amplifying economic shocks, while the currency denomination of debt influences long-term debt issuance patterns and financial stability across global economies. The first chapter investigates the role of different types of borrowing constraints in generating amplification effects. Economies regularly experience episodes during which a significant fraction of agents are borrowing constrained. These constraints give rise to amplification effects, which occasionally generate aggregate demand shortages. I analyzes such amplification effects in a stylized model with both asset- and income-based borrowing constraints. Income-based borrowing amplifies shocks to net worth when there is an aggregate demand shortage, and asset-based borrowing amplifies shocks to asset prices.

The second chapter investigates how macroeconomic stabilization policies can redress the amplification effects. A tax on lenders to subsidize borrowers improves the welfare of borrowers and undermines that of lenders when there is no aggregate demand shortage, but can lead to a Pareto improvement when aggregate demand externalities are large. Liquidity operations can lead to a Pareto improvement independent of whether there is an aggregate demand shortage. If both types of borrowing constraints are present, taxing lenders to subsidize asset-constrained agents rather than income-constrained agents can improve welfare more. With either type of borrowing constraint, a macroprudential tax on debt issuance, combined with a lump-sum transfer between borrowers and lenders, will result in constrained efficient allocations.

The international currency status of the dollar and the euro underwent significant changes after the Great Financial Crisis. The third chapter identifies the rise of the dollar and the fall of the euro in foreign currency debt issuance in international capital markets by countries whose sovereign currencies are neither the U.S. dollar nor the euro after the Great Financial Crisis. This overall trend is not observed in the evolution of short-term debt, but rather in long-term debt, and the widened gap between dollar debt and euro debt is most pronounced for debt issued by the financial sector and by Emerging Market Economies. A recursive VAR analysis indicates the rise of the dollar and the fall of the euro as a result of growing safe asset demand as the dollar appreciates; and an increase in the issuance of dollar debt by firms in Advanced Economies seeking lower financing cost as yield differential shrinks, which in turn reduced euro debt issuance by both the financial and non-financial sectors in Advanced Economies and Emerging Market Economies.