| Summary: | My dissertation is a positive analysis of two topics in macroeconomics: New businesses, entrepreneurship, and job creation is the subject of the first essay, while the second essay analyses the effect of government stimulus, when stimulus has to be financed with distortionary taxes.
The essay "Entrepreneurial Tail Risk: Implications for Employment Dynamics'' has the premise that starting a new business is risky. It asks how entrepreneurial productivity risk has changed over time in the US and how this has affected employment. I estimate this risk using micro data on the size distribution of new businesses and their exit rates. The essay distinguishes upside and downside risk and analyzes their effects in a tractable dynamic general equilibrium model of entrepreneurship. At the heart of the model in the essay is the decision of potential entrepreneurs whether to start a new business in the face of uninsurable productivity risk. Applied to US time series data, structural estimates suggest that higher upside risk explains much of the high job creation in the late 1990s. Over the entire sample period, time variation in risk explains 40% to 55% of the variation in employment of new businesses. Reduced form results show that this relationship is strongest in IT-related industries. Counterfactual simulations show that the explanatory power of a model with a single risk factor drops by 30% to 50% compared to the baseline estimates.
In the essay on "Fiscal Stimulus and Distortionary Taxation'', Harald Uhlig and I quantify the fiscal multipliers in response to the American Recovery and Reinvestment Act (ARRA) of 2009. We extend the benchmark Smets-Wouters (2007) New Keynesian model, allowing for credit-constrained households, the zero lower bound, government capital and distortionary taxation. The posterior yields modestly positive short-run multipliers around 0.53 and modestly negative long-run multipliers around -0.36. A simple three equation New Keynesian model with sticky wages and credit-constrained households explains the central empirical findings through the interplay of negative demand effects and negative wealth effects due to higher labor taxes.
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