| Chapter 1 explores the strong reduction in the volatility of GDP in the U.S. in the last 20 years. By some measures it has declined nearly by half. This could have been due to a break in the shock-generating process or due to low conditional volatility. Alternatively, this chapter explores changes in the environment that might have mitigated the propagation of shocks through the economy, while preserving the same shock-generating process. One such factor is the rapid growth of U.S. multinational corporations. By introducing internationally diversified multinational firms into the Financial Accelerator framework, the model economy exhibits investment and GDP volatilities closer to those in recent U.S. data than a standard RBC model or a model with only domestic firms.; Chapter 2 develops a theoretical model to explore the relationship between openness to trade and long-term income inequality. Empirical evidence on the issue is mixed, though greater inequality is often cited as a possible cost of trade liberalization. To quantify the effect of liberalization on inequality I calibrate a two-sector (agriculture and non-agriculture) open-economy macroeconomic model to the Mexican economy. Agents in the model are subject to idiosyncratic, uninsurable labor income risk, and precautionary saving generates endogenous distributions of wealth and income. When preferences are characterized by subsistence floor for food consumption, trade liberalization implies large welfare gains for low wealth agents. At the same time, liberalization increases long-run wealth and income inequality. After liberalization land-owners are worse off since the price of land falls along with the relative price of the agricultural commodity. When tariff revenue must be replaced by an alternative instrument, raising consumption taxes is preferred to higher taxes on labor or capital. |
