Essays on Disciplining Financial Frictions in Macroeconomic Models

This dissertation examines the role that financial frictions play in the propagation of aggregate shocks, and the extent to which they are detrimental for firm value and welfare. The first chapter in this dissertation estimates a general equilibrium model of firm dynamics with endogenous leverage, bankruptcy, innovation, and entry decisions to quantify the private and public gains from resolving the debt overhang problem. The second chapter incorporates aggregate shocks to TFP, the level of idiosyncratic asset volatility, and the retained value of the firm upon bankruptcy in the model in chapter one, and analyzes the extent to which alleviating the debt overhang problem changes how aggregates and firm decisions respond to these different aggregate shocks. The third chapter develops a novel decomposition of changes in aggregate productivity that does not require the identification of firm-level TFP or production function coefficients, and implements this decomposition on U.S. public non-financial firms over the period of 1972-2012