Working Papers

Corporate Finance and Monetary Policy (Joint with Randall Wright and Cathy Zhang)
We develop a model where entrepreneurs can finance random investment opportunities using trade credit, bank-issued assets, or money. They search for funding in an over-the-counter market where the terms of the contract, including the interest rate, loan size, and down payment, are negotiated subject to pledgeability constraints. The theory has implications for the cross-sectional distribution of corporate loans and interest rates, pass through from nominal to real rates, and the transmission of monetary policy, described by either changes in the money growth rate or open market operations. We also consider the effects of imposing different regulations on banks.


 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.

Working through the Distribution: Money in the Short and Long Run (joint with Pierre-Olivier Weill and Russell Wong)
We construct a tractable model of monetary exchange with search and bargaining that features a non-degenerate distribution of money holdings in which one can study the short-run and long-run effects of changes in the money supply. A one-time money injection in a centralized market with flexible prices generates an increase in aggregate real balances in the short run, a decrease in the rate of return of money, and a redistribution of consumption levels across agents. Small injections can lead to short-run deflation while large injections generate inflation. Anticipated inflation can raise output and welfare when unemployment is high.


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.

Open Market Operations (Joint with Randall Wright and Sylvia Xiao)

We develop a monetary model with liquid government bonds as well as currency, and use it to study different monetary policies, including open market operations. Various specifications are considered for market structure, and for the liquidity of money and bonds — i.e., their acceptability or pledgeability — in their roles as media of exchange or collateral. The theory delivers sharp predictions even when there are multiple equilibria. It can also generate phenomena like negative nominal interest rates, endogenous market segmentation, liquidity traps and the appearance of sluggish nominal prices and interest rates. Importantly, we do not just take differences in asset acceptability or pledgeability as given, but explain them using information frictions, and show how this can generate multiple equilibria.


Liquidity: A New Monetarist Perspective (Joint with Ricardo Lagos and Randall Wright)

This essay surveys New Monetarist approaches to liquidity. Work in this literature strives for empirical and policy relevance, but also rigorous foundations. Questions include: What is liquidity? Is money essential in achieving desirable outcomes? Which objects can or should serve as media of exchange? Can asset prices differ from fundamentals? What are the functions of commitment and collateral in credit markets? How does money interact with credit and intermediation? How should we conduct monetary policy? The research we summarize emphasizes the micro structure of frictional transactions, and studies how institutions like monetary exchange, credit arrangements or intermediation facilitate the process.


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.