Two essays on macroeconomics

Abstract

This thesis is composed of two essays on macroeconomics. In the first essay, motivated by the empirical evidence that implies a negative correlation between government trust and the size of informal sector, we develop a gametheoretical model to account for this dynamic. We construct a model in which government type, which cannot be directly observed by households, follows a Markov chain; and households allocate their labor between formal and informal sector, each with di↵erent production technologies. We characterize the Markov perfect equilibrium of the model that implies that the size of informal sector is relatively higher for economies in which the level of government trust is lower. In the second essay, we develop a model-based approach to create measures of di↵erent types of economic risks, namely fiscal risk, financial risk, and labor market risk, for a panel of countries. We use an annual cross-country dataset that includes fiscal policy variables, labor market variables, and financial variables to explain their e↵ect on the variation in total productivity. Using the estimated TFP series, we run a DSGE model by calibrating model parameters to match several moments in the data so as to obtain measures for fiscal, financial and labor market risks. This exercise allows us to construct a model-based dataset of three categories of risks mentioned above, and to calculate the “true welfare costs” of di↵erent kinds of country-specific risks.