Working Papers

Dynamic Indeterminacy and Welfare in Credit Economies (joint with Zach Bethune and Tai-Wei Hu)
We characterize the equilibrium set and constrained-efficient allocations of a pure credit economy with limited commitment under both pairwise and centralized meetings. We show that the set of equilibria derived under "not-too-tight" solvency constraints (Alvarez and Jermann, 2000; Gu et al., 2013b) is of measure zero in the whole set of Perfect Bayesian Equilibria. There exist a continuum of endogenous credit cycles of any periodicity and a continuum of sunspot equilibria, irrespective of the assumed trading mechanism. Moreover, any equilibrium allocation of the corresponding monetary economy is an equilibrium allocation of the pure credit economy but the reverse is not true. On the normative side, we establish conditions under which the Second Welfare Theorem of Alvarez and Jermann (2000) fails to apply, i.e., constrained-efficient allocations cannot be implemented with "not-too-tight" solvency constraints.


A Tractable Model of Monetary Exchange with Ex-Post Heterogeneity (joint with Pierre-Olivier Weill and Russell Wong) NBER Working Paper # 21179
We construct a continuous-time, pure currency economy with the following three key features. First, our modelled economy incorporates idiosyncratic uncertainty--- households receive infrequent and random opportunities of lumpy consumption---and displays an endogenous, non-degenerate distribution of money holdings. Second, the model is tractable: properties of equilibria can be obtained analytically, and equilibria can be solved in closed form in a variety of cases. Third, it admits as a special, limiting case the quasi-linear economy of Lagos and Wright (2005) and Rocheteau and Wright (2005). We use our modeled economy to obtain new insights into the effects of anticipated inflation on individual spending behavior, the social benefits and output effects of inflationary transfer schemes, and transitional dynamics following unanticipated monetary shocks.


Financial Frictions, The Housing Market, and Unemployment (joint with Bill Branch and Nicolas Petrosky-Nadeau)

We develop a two-sector search-matching model of the labor market with imperfect mobility of workers, augmented to incorporate a housing market and a frictional goods market. Homeowners use home equity as collateral to finance idiosyncratic consumption opportunities. A financial innovation that raises the acceptability of homes as collateral raises house prices and reduces unemployment. It also triggers a reallocation of workers, with the direction of the change depending on firms' market power in the goods market. A calibrated version of the model under adaptive learning can account for house prices, sectoral labor flows, and unemployment rate changes over 1996-2010.


Limelight on Dark Markets: Theory and Experimental Evidence on Liquidity and Information (Joint with Aleksander Berentsen and Mike McBride)

Supplemental Appendices

We investigate how informational frictions affect trading in OTC markets in theory and in a laboratory setting. Subjects, matched pairwise at random, trade divisible commodities that have different private values for a divisible asset with a common value. We compare a bargaining game with complete information with a bargaining game where agents can produce fraudulent assets at some cost and are privately informed about the quality of their assets. The threat of fraud strongly reduces the subjects' ability to exploit the gains from trade, and it reduces significantly both the size of the trade and the acceptability of the asset.