Essays on Government Policy and Macroeconomics.

Abstract

This dissertation consists of two chapters on the effect of government policy and macroeconomics. Chapter 1 analyzes two aspects of post 1980 United States regulatory regime for commercial banks. Using FDIC historical and bank level data, it finds that risk weighting led to the industry holding more mortgages, mortgage securities, and derivatives while asset concentration is associated with the largest banks maintaining less capital, increased mortgaged lending during the housing boom, and large derivative positions. These findings suggest that allowing asset concentration and managing the risk of banks through risk weighting contributed to the Great Financial Crisis of 2007. Chapter 2 focuses on how the Great Inflation of the 1970s caused a significant rise in household income taxes. As the tax brackets were not automatically indexed for inflation, average and marginal tax rates increased. Since households could expect that the tax brackets would be adjusted for inflation in the future and inflation was persistently high for several years there was an incentive for intertemporal labor substitution. I simulate a model to estimate the importance of this phenomenon and find that the shock can account for a significant amount of the fall of labor during both episodes of the Great Inflation. These results offer a possible reason for rising inflation and falling employment in the 1970s and that institutional features such as sticky tax brackets can be important sources of monetary non-neutrality.