Essays in Money, Liquidity and the Wider Economy PDF Download

Author: Michael Ellington
Publisher:
ISBN:
Category :
Languages : en
Pages :

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Author: Timothy Gordon Jones
Publisher:
ISBN:
Category : Interest rates
Languages : en
Pages : 188

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This dissertation explores different aspects of the interaction between money and asset prices. The first chapter investigates how a firm's financing affects its decision to update prices: does linking interest rates to inflation alter the firm's optimal price updating strategy? Building on the state dependent pricing models of Willis (2000) and the price indexing literature of Azariadis and Cooper (1985) and Freeman and Tabellini (1998), this model investigates the financing and price updating decisions of a representative firm facing state-dependent pricing and a cash-in-advance constraint. The model shows the circumstances under which a firm's financing decision affects its price updating decision, and how the likelihood of changing prices affects the amount borrowed. It also illustrates how the use of nominal (as opposed to inflation-linked) interest rates leads to a lower frequency of price updating and higher profits overall for a firm facing menu costs and sticky prices. The second chapter extends the bank run literature to present a theoretical mechanism that explains how money supply can affect asset prices and asset price volatility. In a two period asset allocation model, agents faced with uncertainty cannot perfectly allocate assets ex-ante. After income shocks are revealed, they will be willing to pay a premium over the future fundamental value for an asset in order to consume in the current period. The size of this premium is directly affected by the supply of money relative to the asset. This paper explores the relationship between economy-wide monetary liquidity on the mean and variance of equity returns and in relation to market liquidity. At an index level, I test the impact of money-based liquidity measures against existing measures of market liquidity. I proceed to do a stock level analysis of liquidity following Pastor and Stambaugh (2003). The results indicated that measures of aggregate money supply are able to match several of the observed relationships in stock return data much better than market liquidity. At an individual stock level, monetary liquidity is a priced factor for individual stocks. Taken together, these papers support the idea that changes in the money supply have consequences for the real economy.

Author: Seungduck Lee
Publisher:
ISBN: 9780355150650
Category :
Languages : en
Pages :

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This dissertation analyzes the determinants of asset prices and the effect of monetary policy on not only asset prices, but also on other macroeconomic outcomes such as asset market trade volume and welfare in an environment with search frictions. The analysis in such an environment helps to examine an important component of determining asset prices: liquidity, which is assets' ability to facilitate transactions. Hence, the dissertation particularly examines the effect of monetary policy on asset prices that the traditional asset pricing models without search frictions may be missing, and also explain some phenomena which are often considered abnormal in macroeconomics and international macroeconomics such as negative nominal yields and the Uncovered Interest Parity puzzle. The dissertation consists of three stand-alone papers and I provide their abstracts as follows. The first chapter is "Money, Asset Prices and the Liquidity Premium". This paper examines the effect of monetary policy on the market value of the liquidity services that financial assets provide, known as the liquidity premium. Money supply and nominal interest rates have positive effects on the liquidity premium, but asset supply has a negative effect. This implies that liquid financial assets aresubstantive substitutes for money, and that the opportunity cost of holding money plays a key role in explaining variation in the liquidity premium and thus in asset prices. The higher cost of holding money due to higher money growth rates leads to a higher liquidity premium. My empirical analysis with U.S. Treasury data over the period from 1946 and 2008 confirms the theoretical predictions. The theory also suggests that the liquidity properties of assets can cause negative nominal yields when the cost of holding money is low and liquid assets are scarce. I present empirical findings in the U.S. and Switzerland to support this prediction. The second chapter is a joint paper with Kuk Mo Jung, titled "A Liquidity-Based Resolution of the Uncovered Interest Parity Puzzle". In this paper, a new monetary theory is set out to resolve the "Uncovered Interest Parity (UIP)" Puzzle. It explores the possibility that liquidity properties of money and nominal bonds can account for the puzzle. A key concept in our model is that nominal bondscarry liquidity premia due to their medium of exchange role as either collateral or a means of payment. In this framework, no-arbitrage ensures a positive comovement of real return on money and nominal bonds. Thus, when inflation in one country becomes relatively lower, i.e., real return on this currency is relatively higher, its nominal bonds should also yield higher real return. We show that their nominal returns can also become higher under the economic environment where collateral pledgeability and/or liquidity of nominal bonds and/or collateralized credit based transactions are relatively bigger. Since a currency with lower inflation is expected to appreciate, the high interest currency does indeed appreciate in this case, i.e., the UIP puzzle is no longer an anomaly in our model. Our liquidity based theory can in fact help understanding many empirical observations that risk based explanations find difficult to reconcile with. The third chapter is joint work with Athanasios Geromichalos, Jiwon Lee, and Keita Oikawa, titled "Over-the-Counter Trade and the Value of Assets as Collateral" and was published in Economic Theory in 2016. We study asset pricing within a general equilibrium model where unsecured credit is ruled out, and a real asset helps agents carry out mutually benecial transactions by serving as collateral. A unique feature of our model is that the agent who provides the loan might have a low valuation for the collateral asset. Nevertheless, the lender rationally chooses to accept the collateral because she can access a secondary asset market where she can sell the asset. Following a recent strand of the finance literature, based on the influential work of Duffie, Garleanu, and Pedersen (2005), we model this secondary asset market as an over-the-counter market characterized by search and bargaining frictions. We study how the asset's property to serve as collateral affects its equilibrium price, and how the asset price and the economy's welfare are affected by the degree of liquidity in the secondary asset market.

Author: Wukuang Cun
Publisher:
ISBN:
Category : Financial crises
Languages : en
Pages : 139

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This dissertation seeks to understand how financial frictions arise and how they can affect the economy, and explores the implications of financial frictions for monetary policy during crises. Specifically, Chapter 2 and 3 study the endogenous nature of information asymmetry and explore its implications for financial markets and the macro economy. Chapter 4 studies the potential side effects of large scale asset purchase by central banks. In Chapter 2, I study a dynamic economy in which the information on asset quality is asymmetric and the degree of information asymmetry endogenously varies with the macro-economy, which amplifies the effects of shocks. In the model, firms hold assets of heterogeneous quality and borrow for operating expenses. Production is subject to idiosyncratic shocks, which may force the firms to liquidate their assets to pay off debts. Firms are initially uninformed of the qualities of their assets, but they can acquire private information on their own assets at a cost. Private information is individually beneficial, but it creates a lemons problem that lowers market liquidity and distorts economic decisions. Adverse shocks trigger private information acquisition, which exacerbates the lemons problem. As results, market liquidity drops and economic activity declines. The model can generate larger fluctuations in financial and macroeconomic variables than an otherwise the same model with the level of information asymmetry being fixed. In Chapter 3, I provide a possible explanation for the countercyclical movements in the measures of asset return volatility. In the model, external financing is costly due to the information asymmetry between borrowers and lenders. When the borrowers' financial conditions are worsened, the costs of external financing rise. Borrowers respond by increasing their transparency to outside investors to mitigate information asymmetry, which helps reduce the external financing cost. As a result, returns on external financing instruments disperse and fluctuate more as more information is disclosed, leading to increases in the cross sectional dispersion and the time series volatility of returns. This model can generate countercyclical dispersion, volatility in returns and external finance premium, with correlation coefficients between pairs of these measures quantitatively in line with the data. In Chapter 4, I explore the potential side effects of central bank asset purchase. In the model, commercial banks and shadow banks hold liquid assets as part of their operations. Asset purchases by the central bank decreases the supply of liquid assets that shadow banks can directly hold. When commercial banks do not face binding leverage constraints, shadow banks respond by increasing their deposits in or credit lines from commercial banks and central bank asset purchases are neutral. In the presence of a binding leverage constraint, however, asset purchases create distortions that decrease shadow banks' liquidity holdings and their lending. While conventional wisdom says that central bank asset purchases should be expansionary, I show that central bank asset purchases are necessarily contractionary when the level of bank reserves is high.

Author: Marieh Marieh Azizirad
Publisher:
ISBN:
Category :
Languages : en
Pages : 0

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To answer the question of whether an interest rate hike causes inflation to increase or decrease, I estimate a liquidity-augmented empirical model of interest rates, inflation, and growth on postwar US data, using three methods: a time-varying structural vector autoregression, a system of latent variables, and a structural vector autoregression with doubtful identifying assumptions. I find that an interest rate hike has a short-run non-positive effect on inflation, regardless of its duration. This result contrasts with the Neo-Fisherian prediction of a positive short-run response of inflation to a permanent shift in interest rates. At the same time, inflation and the nominal interest rate move in the same direction in the long-run, although not one-for-one. I also find that the short- and long-run interactions of macroeconomic variables including inflation and the interest and growth rates have changed across eras from the 1950s to 2016. Finally, the results reinforce the importance of the liquidity premium on near-money assets in macroeconomic analyses.

Author: Ye Li
Publisher:
ISBN:
Category :
Languages : en
Pages :

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The complementarity between money and credit arises from financial frictions and amplifies economic fluctuations. In the third essay, my coauthors and I model the liquidity demand of banks. To buffer liquidity shocks, banks hold central bank reserves and can borrow reserves from each other. The propagation of liquidity shocks, depend on the topology of interbank credit network, but more importantly, on the type of equilibrium on the network (strategic complementarity vs. substitution). The model is estimated using data on reserves, interbank credit, bank balance sheets, and macroeconomic variables. We propose a method to identify banks that contribute the most to systemic risk, and offer policy guidance by comparing the decentralized outcome with the choice of a benevolent planner.

Author: Eric Monnet
Publisher: International Monetary Fund
ISBN: 1498320473
Category : Business & Economics
Languages : en
Pages : 48

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This paper explores what history can tell us about the interactions between macroprudential and monetary policy. Based on numerous historical documents, we show that liquidity ratios similar to the Liquidity Coverage Ratio (LCR) were commonly used as monetary policy tools by central banks between the 1930s and 1980s. We build a model that rationalizes the mechanisms described by contemporary central bankers, in which an increase in the liquidity ratio has contractionary effects, because it reduces the quantity of assets banks can pledge as collateral. This effect, akin to quantity rationing, is more pronounced when excess reserves are scarce.

Author: Jordi Galí
Publisher: Princeton University Press
ISBN: 1400866278
Category : Business & Economics
Languages : en
Pages : 295

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The classic introduction to the New Keynesian economic model This revised second edition of Monetary Policy, Inflation, and the Business Cycle provides a rigorous graduate-level introduction to the New Keynesian framework and its applications to monetary policy. The New Keynesian framework is the workhorse for the analysis of monetary policy and its implications for inflation, economic fluctuations, and welfare. A backbone of the new generation of medium-scale models under development at major central banks and international policy institutions, the framework provides the theoretical underpinnings for the price stability–oriented strategies adopted by most central banks in the industrialized world. Using a canonical version of the New Keynesian model as a reference, Jordi Galí explores various issues pertaining to monetary policy's design, including optimal monetary policy and the desirability of simple policy rules. He analyzes several extensions of the baseline model, allowing for cost-push shocks, nominal wage rigidities, and open economy factors. In each case, the effects on monetary policy are addressed, with emphasis on the desirability of inflation-targeting policies. New material includes the zero lower bound on nominal interest rates and an analysis of unemployment’s significance for monetary policy. The most up-to-date introduction to the New Keynesian framework available A single benchmark model used throughout New materials and exercises included An ideal resource for graduate students, researchers, and market analysts

Author: Board of Governors of the Federal Reserve System
Publisher:
ISBN: 9780894991967
Category : Banks and Banking
Languages : en
Pages : 0

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Provides an in-depth overview of the Federal Reserve System, including information about monetary policy and the economy, the Federal Reserve in the international sphere, supervision and regulation, consumer and community affairs and services offered by Reserve Banks. Contains several appendixes, including a brief explanation of Federal Reserve regulations, a glossary of terms, and a list of additional publications.

Author: International Monetary Fund. Monetary and Capital Markets Department
Publisher: International Monetary Fund
ISBN: 1498324029
Category : Business & Economics
Languages : en
Pages : 109

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The October 2019 Global Financial Stability Report (GFSR) identifies the current key vulnerabilities in the global financial system as the rise in corporate debt burdens, increasing holdings of riskier and more illiquid assets by institutional investors, and growing reliance on external borrowing by emerging and frontier market economies. The report proposes that policymakers mitigate these risks through stricter supervisory and macroprudential oversight of firms, strengthened oversight and disclosure for institutional investors, and the implementation of prudent sovereign debt management practices and frameworks for emerging and frontier market economies.