Essays in Unconventional Monetary Policy and Firm Dynamics

Abstract

This collection of essays uses microdata to investigate the effects of unconventional monetary policy and exchange rate shocks on the macroeconomy. Chapter 1 studies the transmission mechanisms of a prominent competitive devaluation in Japan and analyzes its effects on firm dynamics. The yen devaluation is shown to negatively affect exporters in terms of employment, domestic sales and market capitalization relative to their nonexporting peers. A New Keynesian general equilibrium model featuring common ingredients from international trade, including firm heterogeneity, varying intermediate import intensities, and international dollar pricing is constructed to explain the findings. Chapter 2 shows that banks' exposure to large-scale asset purchases, as measured by the relative prevalence of mortgage-backed securities on their books, affects lending following unconventional monetary policy shocks. The chapter finds strong effects of the first and third round of quantitative easing (QE1 and QE3) on credit, with highly affected commercial banks increasing lending by 3% relative to their counterparts. QE2 had no significant impact, consistent with its exclusive focus on Treasuries sparsely held by banks. Overall, banks respond heterogeneously and the type of asset being targeted is central to QE. Chapter 3 uses a uniquely granular online retail dataset that spans Russia's enormous currency depreciation in late 2014 to show that firms choose to offer lower quality products in response to rising input costs. This reallocation is not driven by an income shock or "flight from quality". To explain quality downgrading, the chapter proposes a model of demand and firm dynamics where consumers value low prices and high qualities. It is argued that a positive correlation between marginal cost and quality can explain quality downgrading. The model is able to generate a reallocation in offerings towards low cost, low quality products, and yields starkly different welfare implications following an exchange rate shock than a model with only cost heterogeneity.