Veronica Guerrieri

Capital Deepening and Nonbalanced Economic Growth

We present a model of nonbalanced growth based on differences in factor proportions and capital deepening. Capital deepening increases the relative output of the more capital‐intensive sector but simultaneously induces a reallocation of capital and labor away from that sector. Using a two‐sector general equilibrium model, we show that nonbalanced growth is consistent with an asymptotic equilibrium with a constant interest rate and capital share in national income. For plausible parameter values, the model generates dynamics consistent with U.S. data, in particular, faster growth of employment and slower growth of output in less capital‐intensive sectors, and aggregate behavior consistent with the Kaldor facts.

Credit Crises, Precautionary Savings, and the Liquidity Trap

We use a model a la Bewly-Huggett-Ayagari to explore the effects of a credit crunch on consumer spending. Households borrow and lend to smooth idiosyncratic income shocks facing an exogenous borrowing constraint. We look at the economy response after an unexpected permananent tightening of this constraint. The interest rate drops sharply in the short run and then adjusts to a lower steady state level. This is due to the fact that after the shock a large fraction of agents is far below their target holdings of precautionary savings and this generates a large temporary positive shock to net lending. We then look at the effects on output. Here two opposing forces are present, as households can deleverage in two ways: by consuming less and by working more. We show that under a reasonable parametrization the effect on consumer spending dominates and precautionary behavior generates a recession. If we add nominal rigidities two things happen: (i) the demand-side dominates output dynamics, and (ii) there is a lower bound on the interest rate adjustment. These two elements tend to amplify the recession caused by the credit tightening.

Inefficient Unemployment Dynamics under Asymmetric Information

I explore the efficiency properties of a competitive search model with match‐specific private information and limited commitment on the workers’ side. In a static setting the competitive search equilibrium is constrained efficient, whereas in a dynamic setting it is constrained inefficient whenever the initial unemployment rate is different from its steady‐state level. Inefficiency arises because the workers’ outside option becomes endogenous and affects the severity of the distortion due to the informational friction. This generates a novel externality: firms offering contracts at a given time do not internalize their effect on the outside option of workers hired in previous periods.

Heterogeneity, Job Creation and Unemployment Volatility

In this paper, I explore the impact of match-specific heterogeneity at the job creation margin on business cycle fluctuations. I show that this form of heterogeneity alone does not help to amplify labor market volatility, either under full or under asymmetric information. First, I show analytically that, under full information, heterogeneity has no first-order effect on the response of unemployment and job creation to productivity, and actually tends to dampen the response of market tightness. Then, in a series of calibrations, I show that with both full and asymmetric information, the model delivers labor market volatilities close to the representative-agent, full-information benchmark.

Markets with Multidimensional Private Information

This paper explores price formation when sellers are privately informed about their preferences and the quality of their asset. There are many equilibria, including a semi- separating one in which each sellers price depends on a one-dimensional index of her preferences and asset quality. This multiplicity does not rely on off-the-equilibrium path beliefs and so is not amenable to standard signaling game refinements. The semi- separating equilibrium may be not Pareto efficient, even if it is not Pareto dominated by any other equilibrium. Instead, efficient allocations may require transfers across uninformed buyers, inconsistent with any equilibrium.