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Agency and nominal frictions in financial markets Morales Veas, Gonzalo Andrés

Abstract

This dissertation examines the effects of nominal and agency frictions in three different environments. The first essay builds a New Keynesian model to analyze the effects of changes in the maturity structure of nominal government debt on the real economy and inflation. The model includes nominal frictions, a time-varying maturity structure of nominal debt and allows for variations in the interaction between the monetary and the fiscal authorities. This essay shows that when the slope of the term structure of interest rates is nonzero in a fiscally-led policy regime the irrelevance of open market operations, changing the duration of government liabilities, is violated. Furthermore, maturity restructuring policies, conditional on the slope of the term structure of interest rates, can smooth macroeconomic fluctuations and offer substantial welfare benefits. The second essay studies how agency frictions between spouses affect their consumption, asset allocation and marital decisions. To examine this nexus, a life cycle model with limited commitment between spouses is built. The model is able to endogenously produce time-varying risk aversion at the household-level through changes in the relative income between spouses that alter their relative bargaining power. Consistent with the data, changes in relative income are associated with significant shifts in the portfolios of households. Also, the model can rationalize the empirical patterns relating marital transitions to changes in portfolio allocations. Furthermore, the risk-sharing benefits of marriage in the model imply a positive link between wealth and risky asset holdings across households, which is observed in the data. The final essay presents a dynamic agency model to study the effects of firms' exposure to aggregate risk on CEOs' contracts. The model features a risk-averse representative shareholder, risk-averse managers that exert unobservable effort and firms that are heterogeneously exposed to aggregate risk. In the model, managers are incentivized by a mix of short- and long-term compensation, and the threat of being fired. The contract differs between firms with different exposure to aggregate risk. The model can explain salient features in the data; namely, the negative relation between aggregate risk and long-term compensation and the procyclicality of aggregate turnover.

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Attribution-NonCommercial-NoDerivs 2.5 Canada

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