Essays in macroeconomics

What are the welfare costs of price rigidities when labor mobility is restricted? What are the effects of pecuniary externality in high-leveraged economies? Should Central Banks react to changes in asset prices? How did the credit risk modeling evolve since 1970s? This dissertation uses New Neoclassical Synthesis (NNS) models to answer these questions and presents a literature review of credit risk modeling.;Chapter 1 studies the welfare costs of price rigidities in an economy without labor mobility. Labor immobility plays an allocative role and causes large fluctuations in hours of work. This, in turn, magnifies the welfare costs of nominal rigidities. The welfare costs can be eliminated by strict CPI inflation targeting in a one-sector model. When there are two vertically integrated sectors, strict CPI inflation targeting rule is no longer optimal due to the distinct sectoral inflation rates. In the two-sector model, I show that a modified Taylor rule with two measures of inflation is nearly optimal even when labor mobility is restricted.;Chapter 2 studies capital fire sales of the firms in an economy with financial frictions and price rigidity hit by negative aggregate productivity shocks. Collateral constraints and the fact that asset prices are determined in a competitive market generate pecuniary externality. Inefficiency losses in aggregate quantities are more pronounced in an economy with high leverage because of the higher negative externality stemming from fire sales. As goods price inflation can positively affect borrowers' net worth by reducing the real burden of the entrepreneur's current debt for given interest rate, a Taylor rule with a mild reaction to inflation and a positive reaction to asset prices almost achieves welfare under Ramsey solution.;Chapter 3 presents a literature review of the credit risk models developed since 1970s. These models are divided into two main categories: (a) credit pricing models, and (b) credit value-at-risk (VaR) models. Three main approaches in credit pricing models discussed are (i) first generation structural-form models, (ii) second generation structural-form models, and (iii) reduced form models. Credit VaR models are examined under two main categories: (i) default mode models (DM) and (ii) mark-to-market (MTM) models.