Date of Award

Spring 2022

Document Type


Degree Name

Doctor of Philosophy (PhD)



First Advisor

Geanakoplos, John


This dissertation consists of three essays at the intersection of macroeconomics and finance, emphasizing the effects of financial frictions on business cycles based on theoretical, quantitative, and empirical studies. In Chapter 1, I construct an infinite-horizon dynamic stochastic general equilibrium model with a collateral constraint and actual default in equilibrium. Entrepreneurs borrow from households through non-recourse debt contracts backed by capital goods. By taking into account the non-linear payoffs of the collateralized debt contracts and the scarcity of collateral, borrowers and lenders adjust their bid and ask schedules, or equivalently, the credit demand and supply surfaces for debt contracts with different interest rates and loan-to-value ratios. The tangent point between the two credit surfaces maximizes the gains from tranching capital using collateralized debt contracts, and pins down the endogenous leverage driven by the ratio of the price of the senior tranche to the price of the junior tranche of collateral. Therefore, leverage is pro-cyclical if there is more downside risk. I solve the global numerical solution of the model using the method of policy function iteration. I find that (i) the occasionally binding collateral constraint leads to regime-switching dynamics between two stochastic steady states, implying bimodal distributions for key variables; (ii) borrowers and lenders endogenously produce and trade "safe assets" that are almost default-free; (iii) counter-cyclical asset price volatility renders higher downside risk and pro-cyclical leverage, which amplifies business fluctuations. In Chapter 2, Patrick Pintus, Yi Wen, and I stress a new channel through which global financial linkages contribute to the co-movement in economic activity across countries. We show in a two-country setting with borrowing constraints that international credit markets are subject to self-fulfilling variations in the world real interest rate. Those expectation-driven changes in the borrowing cost in turn act as global shocks that induce strong cross-country co-movements in both financial and real variables (such as asset prices, GDP, consumption, investment, and employment). When firms around the world benefit from unexpectedly low debt repayments, they borrow and invest more, which leads to excessive supply of collateral and of loanable funds at a low interest rate, thus fueling a boom in both home and abroad. As a consequence, business cycles are synchronized internationally. Such a stylized model thus offers one way to rationalize both the existence of a world business-cycle component, documented by recent empirical studies through dynamic factor analysis, and the factor's intimate link to global financial markets. In Chapter 3, David Aikman, Mathias Drehmann, Mikael Juselius, and I show that for medium-term horizons of three years or more, distributions of cumulative GDP growth are typically bimodal, rather than unimodal with negatively skew, as is well known for annual or quarterly growth rates. In particular, medium-term GDP growth tends to be polarized into two cases: a "normal growth" state and a "depressed growth" state, revealing that economies can become trapped in a low growth mode for a prolonged period of time. We document this for a panel of 33 advanced and emerging market economies using quarterly data from 1975 to 2019. This finding is robust and also generally evident at the regional level. Financial crises account for the dominant proportion of these protracted weak growth outcomes. Our findings are manifestly inconsistent with textbook Real Business Cycle and New Keynesian models with weak internal propagation and dynamics, but are more consistent with models that feature occasionally binding financial constraints and endogenous growth models where financial frictions can persistently depress growth in crisis states. Our findings emphasize the importance of using macro-prudential and other policies to keep financial imbalances that can lead to crises in check.