Essays on financial markets and macroeconomic activities

This thesis consists of three papers addressing different aspects of financial markets and macroeconomic activities. Firm Risks, Credit, and Labor Market Fluctuations studies the effect of changes in firm risks on the cyclical properties of the labor market. I develop a general equilibrium model in which the adjustment of employment is costly. Financial frictions arise from the limited liability property of the contract between lenders and firms. The changes in firm risks alter the amount of debt that firms can borrow to finance their working capital. This mechanism amplifies labor market fluctuations and displays a countercyclical external finance premium, consistent with the empirical evidence. Shadow Banks and Stabilization Policies studies the interaction between commercial banks and shadow banks and the effect of stabilization policies. I develop a general equilibrium model in which the shadow banks obtain loans from commercial banks in the form of short-term collateralized debt. The moral hazard creates volatile leverage of shadow banks, which makes the economy more vulnerable to economic shocks. Upon an aggregate disturbance, a stabilization policy in the form of direct lending is relatively more efficient than policies aimed at the shadow-banking sector. Bank Capital and Lending: An Analysis of Commercial Banks in the United States empirically evaluates the impact of bank capital on lending patterns of commercial banks in the United States. Using two different measures of capital, namely the capital adequacy ratio and tier 1 ratio, we find a moderate relationship between bank equity and lending. We also use an innovative instrumental variables methodology that helps us overcome the endogeneity issues that are common in such analyses