Wednesday's Charles Sivesind Memorial Seminar with Simon Gilchrist, Boston University
Department alumnus Simon Gilchrist, Boston University, will present the Charles Sivesind Memorial Seminar on Wednesday, April 18. "Uncertainty, Financial Frictions, and Irreversible Investment," is the title of his talk, which will start at 3:40 PM in 368A Heady Hall.
Simon Gilchrist is a professor of economics at Boston University and a research associate at the National Bureau of Economic Research. His research interests relate to monetary economics and applied macroeconomics, focusing on the consequences of financial market turmoil and its impact on real economic activity, with particular focus on the implications for investment behavior, business-cycle dynamics, and the conduct of monetary policy. In recent work, Gilchrist has explored the causes and consequences of financial crises and asset prices bubbles, as well as the appropriate monetary policy response to such events.
He received his BA from Iowa State University in 1984, and his Ph.D. from the University of Wisconsin in 1990. Prior to arriving at Boston University in 1995, Simon Gilchrist served as a staff economist at the Board of Governors of the Federal Reserve System and has held visiting positions at the Massachusetts Institute of Technology and the Federal Reserve Bank of New York. He has also served as an academic consultant to the Board of Governors of the Federal Reserve System, the Bank of Canada, the Bank of England, the Board of Governors of the Federal Reserve System, the Federal Reserve Bank of Boston, the Federal Reserve Bank of New York, the Federal Reserve Bank of San Francisco and the International Monetary Fund. He is currently a member of the editorial board of the American Economic Review, and an associate editor at the Review of Economics and Statistics.
Abstract: This paper analyzes—both empirically and theoretically—how fluctuations in uncertainty interact with financial market imperfections in determining economic outcomes in a model that allows for irreversible investment. With investment irreversibility, an increase in uncertainty reduces investment and economic activity owing to the increase in the real option of waiting to invest. In a standard bond-contracting framework, an increase in uncertainty benefits equity holders at the expense of bondholders. In such an environment, increased uncertainty causes a reduction in bond-financing and implies a higher cost of capital. This mechanism implies a further decline in investment and economic activity.
Using both aggregate time-series and firm-level data, we find strong evidence supporting the notion that financial frictions play a major role in shaping the uncertainty-investment nexus. We then develop a tractable general equilibrium model in which individual firms face time-varying uncertainty and imperfect capital markets when issuing risky bonds and equity to finance irreversible investment projects. We calibrate the uncertainty process using micro-level estimates of shocks to the firms’ profits and show that the combination of uncertainty shocks and financial frictions can generate fluctuations in economic activity that are substantially greater than those obtained under a model with irreversible investment but no financial frictions.
This seminar honors the memory of Charlie Sivesind, a 1975 PhD in the Department of Economics at Iowa State University. Charlie was a visiting assistant professor in this department during the 1974-75 academic year. He also taught courses at Fordham, Colombia, New York, and Pace Universities. From 1975 until early 1979 he worked as an economist with the Federal Reserve Bank of New York. From the time he left the New York Fed until his death, he was employed as a financial economist by Morgan Stanley & Co. During the five years of his professional life, Charlie became a well-known and highly respected monetary economist. In 1977, he won the Abram Award of the National Association of Business Economists for applied economic research.