ESSAYS ON MONEY, CREDIT AND THE ASSET MARKET
Abstract
The main objective of my essays is to investigate some microeconomic underpinnings of the working of asset markets. The first essay analyzes the problem of the existence of a stochastic stock price bubble in a simple aggregate model that includes output-stock market interactions. The second essay examines the role of liquid capital in modelling the monetary services in the production process of a cash-in-advance economy. The third essay considers the implications of potential credit rationing for the formation of a credit market in models with standard debt contracts. To capture the idea that the survival probability of a stochastic stock price bubble can be time or state dependent, I assume in the first essay that whether or not a stochastic bubble will emerge (or remain) depends on some sort of extraneous uncertainty or "animal spirits" of investors activated in turn by the aggregate performance of the economy. By imposing this feasibility condition, a stochastic stock price bubble is shown to be likely to switch to an implausible deterministic one in finite time, and hence should be ruled out by backward induction from the beginning. In the second essay, I assume that in a Stockman-type cash-in-advance economy the producers demand for liquidity services are taken as a factor of production. The main results are as follows: (1) real output depends negatively on anticipated inflation; (2) the steady state income velocity of real balances is positively associated with anticipated inflation; (3) there is a negative relationship between the steady state physical capital stock and anticipated inflation; and (4) the asset returns in steady states are independent of the inflation rate. In the third essay, I extend the standard debt contract model to admit the possibility of self-selection, that is, a rational agent can choose to become a depositor, a loan applicant, or neither. In this set-up, I show that (1) multiple credit rationing equilibria can exist, and are separating if they are self-fulfilling equilibria; (2) the existence of private information is costly for banking since a higher expected return on a bank deposit does not actually attract more deposits; and (3) potential credit rationing serves as a discipline device to maintain a positive number of depositors at the bank even if speculative loan seeking is available.
Degree
Ph.D.
Subject Area
Economic theory
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