Essays On Market Frictions And Money PDF Download

In the first chapter, I propose a liquidity theory of yield curves to analyze the impact of quantitative easing, especially its influence on the yield curve and the inflation rate at the zero lower bound. In the model, a term premium originates from the endogenous difference in liquidity between securities of varying maturities, and the difference is generated by financial market frictions. Financial market frictions cause liquidation risk and reinvestment risk for holding assets, and households with different characteristics make different assessments of the two risks. Accordingly, different households require different term premia and endogenously participate in markets for different maturities. When the short-term interest rate reaches the zero lower bound, long-term interest rates may not reach the reservation interest rates for long-term bond buyers. Thus, central banks' purchases of long-maturity securities can effectively decrease long-term interest rates and the term premium. Moreover, central banks' long-term security purchases decrease inflation at the zero lower bound. These two effects together result in a distinct policy implication: quantitative easing shifts down the real yield curve at the long-maturity end but shifts it up at the short-maturity end if the households are sufficiently diverse in the term premia they require.In the second chapter, I develop a dynamic general equilibrium model to investigate the interaction between asset market liquidity and repo haircuts. In the economy, investors finance their asset purchases through secured borrowing, and the asset is pledged as collateral. Investors' debt roll over before their assets mature. The maturity of assets is random, and default occurs when the borrowing limit is reached. The search and matching friction in the financial market results in delays in collateral liquidation, and therefore causes a gap between the asset price and the borrowing capacity, which is the haircut. The model reveals an endogenous feedback loop between asset market liquidity and repo haircuts. On the one hand, asset market liquidity determines the easiness of asset liquidation, which in turn determines the haircuts. On the other hand, haircuts influence entrepreneurs' borrowing limits and leverage, which affect the probability of default and therefore influence the asset market liquidity. When an unanticipated shock on market liquidity occurs, the increase in haircuts decreases households' borrowing limit and triggers simultaneous defaults. The liquidation of asset further decreases the liquidity of the asset market, and the impact is exacerbated by the endogenous feedback loop.The third and final chapter studies the macroeconomic consequences of central banks' risky asset purchases. By purchasing risky assets, central banks remove them from the financial market and inject money, which is a less risky and more liquid asset. Whereas, the removed risky assets stay in central banks' balance sheets and increase the instability of their budgets, and thus, create inflation risk. The key friction in the model is the market segmentation between the money transaction sector and financial transaction sector. The households in money transaction sector can only use cash as a medium of exchange, but households in the financial transaction sector can use all forms of assets and asset backed securities to facilitate transaction. The central banks' purchases of risky assets overcome the market segmentation and can improve social welfare through risk sharing between financial sector transactions and money transactions. However, because the risk in money transactions cannot be efficiently allocated between risk-averse and risk-neutral traders by financial intermediaries, central banks should make the holding of cash less risky, and it is not optimal for central banks to purchase all risky assets and completely insure the risk in the financial transactions with money transactions.