Essays in Economics

Abstract

This dissertation contains three chapters related to the study of diverse topics in macroeconomics and trade. Chapter 1 focuses on how commodity shocks propagate through the banking sector in small open economies; Chapter 2 studies how inflation expectations depend on past inflation experiences and how this affects the aggregate economy; and Chapter 3 analyzes the effect of cultural proximity on trade at the firm-to-firm level.

In Chapter 1, titled “The Financial Transmission Channel of Commodity Booms”, we examine the financial propagation mechanism in small open economies (SOEs) that links commodity price booms to the non-commodity sector via banks. We propose a mechanism in which a commodity price boom leads to an increase in deposits from commodity exporters into domestic banks, enabling banks to expand their loan supply to non-commodity firms. Then, these non-commodity firms increase their output. Using detailed bank-firm-loan microdata from Peru—an SOE that experienced a commodity price boom in the 2000s—we provide empirical evidence supporting this mechanism.

In Chapter 2, titled “Aggregate Implications of Heterogeneous Inflation Expectations: The Role of Individual Experience”, we show that inflation expectations are heterogeneous and depend on past individual experiences. We propose a methodology to represent the inflation expectations-formation process, where heterogeneity comes from an anchoring-to-the-past mechanism. In a New-Keynesian framework, we find heterogeneous expectations increase shock persistence.

In Chapter 3, titled “Cultural Proximity and Inter-Firm Trade”, we examine how cultural proximity shapes production networks. We combine a firm-to-firm trade dataset for an Indian state with information on cultural proximity. We find a larger cultural proximity reduces prices and fosters trade.