Two essays on macroeconomic shocks and economic fluctuations

This dissertation studies the macroeconomic responses to real and nominal shocks. Over the past two decades, dynamic stochastic general equilibrium (DSGE) models have become the workhorse for modern macroeconomics. However, the underlying sources of economic fluctuations and their transmission are still open questions. My research studies the transmission of real and nominal shocks within DSGE models capable of generating key co-movements observed in aggregate time-series. It consists of two essays.;In the first essay, "News Shocks and Costly Technology Adoption," I study the macroeconomic response to news of future technological innovation under the assumption that firms cannot frictionlessly shift from existing capital stocks to new varieties associated with the impending advance in technology. Combining this new element with variable capital utilization and preferences designed to minimize wealth effects on labor supply, I develop a model that simultaneously accounts for four stylized facts: (1) slow diffusion of new technologies, (2) lumpiness in microeconomic investment, (3) stock prices leading measured productivity, and (4) comovement of consumption, investment and labor hours. On news of a coming technological innovation, firms begin to invest in new capital goods that will allow them to benefit from the innovation once it arrives. Because fixed costs lead some to delay adoption, there is slow diffusion of the new technology. At the firm level, investment in new technology follows an (S, s) rule, and at the aggregate level the model generates a hump-shaped investment pattern typical of the data. Moreover, the introduction of new capital causes the price of old capital to fall, leading stock prices to rise on news of the new technology. Finally, variable capital utilization slows the onset of diminishing returns to labor, so that work hours rise instantly, permitting increases in both consumption and investment.;The second essay "Can Working Capital Resolve the Durable Goods Comovement Problem?" studies the dynamic responses of consumer durables and nondurables to monetary shocks. Empirical studies find that durable and nondurable expenditures both fall following a contractionary monetary shock and that durable expenditures are more interest rate sensitive than nondurable expenditures. In the standard model with flexible prices for durables, aggregate production remains relatively constant in response to a monetary shock. Therefore any fall in the production of nondurables is followed by a rise in the production of durables. To address this, I extend the model to include a realistic financial friction, the fact that firms must borrow to pay in advance for their inputs, i.e., working capital. Following a positive interest rate shock, the working capital channel raises production costs, discouraging production in both durable and nondurable sectors. Given habit formation in nondurables, households avoid large, rapid cuts in nondurable consumption, and nondurables production falls less than durable goods production.