Essays on money and credit

Abstract

When at least some transactions are anonymous and there is missing a publicly available record keeping device, individuals who sell goods cannot force buyers to payback the debt. Thus, money and collateralized credit are essential. This idea is first introduced by Kocherlakota (1998). Lagos and Wright (2005) developed a unified two-market structure framework that incorporates the idea and could be used to study various topics related to money and credit as they are essential components of modern economic systems. This framework is adopted in this dissertation to study how unconventional monetary policies, especially quantitative easing, affect the individual's welfare and social welfare, how central bank utilizes announcement tools to affect the economy, and the interaction between credit condition and capital reallocation over the business cycle. Chapter 1 investigates the effects of conventional and unconventional monetary policy on social welfare. It offers a competitive price posting framework to incorporate multiple asset holdings in a tractable heterogeneous-agent model. Under this framework, the Friedman rule may not maximize the social welfare. The quantity theory holds if the unconventional monetary policy is sterilized. But along the transition path of the central bank's announcement of quantitative easing, it generates intricate dynamics even if the policy is neutral. Numerical examples show that quantitative easing increases the intensive margin of trades in both low-productivity and high-productivity submarkets, which raises the total welfare. On the other hand, exiting quantitative easing decreases the total welfare. If the announcements on implementing and exiting quantitative easing are staggered, the total welfare decreases further. Chapter 2 examines how credit constraints interact with capital reallocation during the business cycle using a search-theoretical model. In this model, a frictionless market serves as the primary market for new investment and production, while a frictional market is used for capital reallocation. Capital serves as both a production input and collateral for securing loans to acquire used capital in the frictional market. Similarly, output serves as both the final consumption good and collateral for purchasing capital. The interaction between credit constraints and capital reallocation amplifies and prolongs the effect of a small and temporary aggregate productivity shock.