Essays on Private Information and Monetary Policy
Abstract
In our economy, many interactions between individuals involve one party possessing more or better information than the other party (i.e., private information). For example, in asset markets, sellers often have better knowledge about the quality of the assets than buyers. Private information also exists when governments collect taxes, because taxpayers typically have more information about their income compared to the government. In my thesis, I explore the implications of private information in three novel contexts.
In Chapter 2, I study the implications of tax evasion for the design of central bank digital currency, which is an emerging payment instrument. I build a general equilibrium framework to explicitly allow tax evasion by agents and tax audits by a government. I find that introducing a deposit-like CBDC can increase welfare and reduce tax evasion. Furthermore, a deposit-like CBDC needs not increase the funding costs of private banks or decrease bank lending and investment. However, paying a high interest rate on CBDC will decrease the central bank's net interest revenue, which may jeopardize central bank independence.
Chapter 3 examines how multi-dimensional private information affects asset market equilibrium. I find that when asset quality is the only source of private information, sellers with high-quality assets signal their quality to buyers through partial retention of assets if and only if their liquidity holdings are large. However, when sellers' valuations of liquid assets are also private information, some sellers with high-quality assets signal their quality even if their liquidity holdings are small. I extend the model to study of the implications for discount window lending and government asset purchases.
Chapter 4 contains a study of illiquidity and partial retention of assets as signals of asset quality in markets with private information. I find that both signals are used in equilibrium. However, sellers with high-quality assets prefer illiquidity over partial retention in the sense that among these sellers, those with higher-quality assets sell marginally fewer assets but with significantly lower probability. In comparison, sellers with low-quality assets prefer partial retention over illiquidity in the sense that among these sellers, those with higher-quality assets sell significantly fewer assets but with only marginally lower probability.