Essays on Monetary Economics
Abstract
My dissertation, which consists of three papers, is devoted to studying the implications of conventional and unconventional monetary policies for inflation, asset prices, and welfare.
The first paper examines the sustainability and effectiveness of negative nominal interest rates. I construct a model of multiple means of payment where the cost of holding paper currency—its storage and security costs—determines the effective rate of return on currency, which establishes the effective lower bound on nominal interest rates. I show that central banks can reduce the effective rate of return on currency, and thus the effective lower bound, by altering their policy on bank reserves. However, reducing the lower bound leads to welfare losses associated with individuals holding more currency. Moreover, sustaining a negative rate by reducing the lower bound has no stimulative effects. This occurs because this policy combination reduces both the rate of return on currency and interest rates on financial assets, leaving the relative interest rates between currency and financial assets unchanged.
In the second paper, I develop a two-country model with financial frictions to study how a central bank's unconventional asset purchases affect international asset prices and welfare. In the model, the key financial frictions are limited commitment, differential pledgeability of assets as collateral, and a scarcity of collateralizable assets. Due to the differential pledgeability of assets, financial intermediaries acquire different asset portfolios depending on their home country. I find that quantitative easing can reduce long-term bond yields and term premia internationally and depreciate the creditor country's currency. Foreign exchange intervention always depreciates the local currency, but it can improve welfare globally if implemented by the creditor country.
The third paper studies the implications of heterogeneous payment choices for monetary policy. I construct a model of money and credit where each consumer participates in a small-value or a large-value transaction depending on a preference shock. Financial intermediaries write deposit contracts for consumers to intermediate credit transactions. The preference shock is private information and is costly for intermediaries to observe. I find that, in equilibrium, financial intermediaries create state-contingent deposit contracts for consumers. However, private information and costly monitoring generate an incentive problem, so that the quantity of credit is constrained for consumers in large-value transactions. The effects of monetary policy on the allocation of means of payment vary depending on the size of transaction.