Three Essays in Macro-Finance

Abstract

This dissertation contains three chapters on macroeconomics and finance. The first chapter studies how policymakers should adapt their macroprudential and monetary policies when the financial sector is vulnerable to belief-driven boom-bust cycles. It shows that distinguishing between the drivers of behavioral biases matters, since new externalities arise when biases are a function of equilibrium prices. In this case, monetary policy also optimally complements macroprudential policy by leaning against the wind even when traditional macroprudential tools are unconstrained. The second chapter, co-authored with Francesca Bastianello, develops a theory of “Partial Equilibrium Thinking”, whereby agents fail to understand the general equilibrium consequences of their actions when inferring information from endogenous outcomes. This theory generates a two-way feedback effect between outcomes and beliefs, which can lead to instability. The third chapter, co-authored with Francesca Bastianello, applies this theory to a macro-finance framework where banks adapt their lending standards to credit conditions. It shows how this behavioral bias generates endogenous credit cycles with systematic reversals, that can be set in motion by credit-supply shocks such as an interest rate cut.