| Summary: | This thesis investigates the role of institutions in shaping macroeconomic phenomena. The first two chapters focus on financial institutions, formalizing interactions between information and competition in frictional credit markets and providing novel predictions for output and efficiency. The third chapter then presents a new approach for empirically assessing the relationship between political institutions and growth.
In Chapter 1, I construct a credit-based model of production to analyze how learning through lending relationships affects the monetary transmission mechanism. I examine how monetary policy changes the incentives of borrowers and lenders to engage in relationship lending and how these changes then shape the response of aggregate output. A central finding is that relationship lending induces a smoother steady state output profile and a less volatile response to certain monetary shocks. This result provides a theoretical basis for cross-country transmission differences via a relationship lending channel.
In Chapter 2, I investigate financial sector inefficiency when banks divide resources between attracting clients and learning about them via screening. I show that banks do not fully internalize the effects that their allocation decisions have on the beliefs and outside options of other lenders. These externalities result in an inefficiently high amount of low-quality credit and thus motivate a tax on activities designed to attract rather than screen borrowers. Steady state results suggest that production exhibits a hump-shaped response to increases in this tax and the model's dynamics indicate that a mild tax can also attenuate business cycle fluctuations.
Chapter 3 then turns to the interaction between political institutions and economic outcomes. In collaboration with Gordon Anderson, I use a notion of distributional dominance to evaluate intertemporal dependence between polity and growth without hindrance from the mix of discrete and continuous variables in our data set. We also use this notion to measure the joint contribution of polity and growth to wellbeing. The results support the view that institutions promote growth more than growth promotes institutions. They also suggest that polity has dominated growth in determining the evolution of wellbeing over the past few decades.
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