Job Market Paper
I develop a macroeconomic model with a central emphasis on the informational role of financial markets. Economic agents save by purchasing financial claims on firms. Crucially, agents produce information about firm productivity to guide their trading decisions. In the aggregate, this information determines the financial market's ability to allocate more capital to productive firms and, thus, pins down total factor productivity (TFP). Using this framework, I study how information varies in response to fundamental (productivity) and non-fundamental (sentiment) macroeconomic shocks. Both lead to similar co-movements in output, asset prices, and investment but affect traders' information production differently. Productivity booms crowd in information and, thus, amplify the initial shock by further increasing TFP. In contrast, sentiment shocks, defined as waves of optimism or pessimism, crowd out information production, which dampens sentiment booms through a decrease in TFP. I show that information production in the competitive equilibrium is generally constrained inefficient for two reasons. First, each agent produces information to extract rents from others (rent-extracting behavior). Second, atomistic agents fail to internalize that their information production helps improve capital allocation and TFP, which is partially revealed through prices (information spillover). As an application, I show that asset purchase programs can be an effective way to address the financial market inefficiencies. Finally, looking through the lens of the model, the US dot-com boom of the late 1990s appears to have been driven by productivity, whereas the US housing boom of the mid 2000s was driven by sentiment.
Booms driven by sentiment increase misallocation and decrease aggregate productivity by discouraging information production.
Booms driven by productivity decrease misallocation and increase aggregate productivity by encouraging information production.
Work in Progress
"Is there a bubble in the SNB stock?"
"Endogenous Leverage and Fragility"
Leverage cycles can generate large swings in asset prices and economic output, with devastating effects if leverage collapses. I develop a comprehensive framework of the nexus between leverage, information production, asset prices, and volatility. I find that two equilibria arise in financial markets with dispersed information and risk-averse lenders. The first equilibrium features high leverage and high asset prices but low information production and low volatility, whereas the second has the opposite properties. This result is obtained through a complementarity between high leverage and low information production. High leverage leads to a concentration of asset ownership in the hands of optimists, discouraging information acquisition as asset prices become upward biased. The lack of new information entering the market leads to a decline in volatility, allowing traders to borrow more against the asset, which has become virtually "safe." The model has implications for security design, endogenous fragility through information production, and financial regulation on leverage and transparency.