Duhyeong Kim

Publications

• International Effects of Quantitative Easing and Foreign Exchange Intervention 

Journal of International Economics, 2023 (Working paper version)

A two-country general equilibrium model is developed to study the global consequences of quantitative easing and foreign exchange intervention. The model incorporates financial frictions such as limited commitment, differential pledgeability of assets as collateral, and a low supply of collateralizable assets. Due to differential asset pledgeability, financial intermediaries acquire different asset portfolios particular to their home country. Quantitative easing can reduce long-term nominal interest rates, mitigate financial frictions globally, and depreciate the currency of the country that supplies more pledgeable assets. The international effects of foreign exchange intervention depend on the implementing country. If implemented by the country that supplies more pledgeable assets, such intervention can ease financial frictions and enhance welfare globally.

Working Papers

• Negative Nominal Interest Rates and Monetary Policy  [December 2024]

How much can central banks reduce nominal interest rates? Can the lower bound be controlled by monetary policy? If so, should central banks reduce it to implement negative interest rates? I construct a model with multiple means of payment where the costs of holding paper currency effectively reduce its rate of return, creating a negative effective lower bound on interest rates. I find that central banks can reduce this lower bound with a non-par exchange rate between currency and bank reserves, but doing so raises currency-holding costs for individuals, leading to welfare losses. Moreover, implementing a negative rate by reducing the lower bound has no benefits because this policy combination lowers both the rate of return on currency and the interest rate on financial assets, leaving relative interest rates unchanged. 

• Interbank Markets, Foreign Banks, and Monetary Policy Under a Floor System  [December 2024]

This paper investigates the role of foreign banks in interbank markets and its implications for U.S. monetary policy under a floor system. We develop a two-country, two-sector banking model to illustrate the behavior of domestic banks, U.S. branches of foreign banks, and other financial institutions in interbank markets. We find that a central bank's balance sheet expansion can increase foreign banks' reserve holdings and their activity in interbank markets, while reducing welfare for both domestic and foreign consumers. In contrast, introducing a reverse repo facility reduces foreign banks' interbank market participation and improves welfare globally.

• Money, Credit, and Financial Intermediation with Private Information and Costly Monitoring

Consumers typically use more cash and less credit in small-value transactions. A model of money and credit is constructed to study the implications of heterogeneous payment choices for monetary policy. In the model, 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. A preference shock is private information to a consumer, which is costly for intermediaries to observe. 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.