Duhyeong Kim - Research

Publications

Negative Nominal Interest Rates and Monetary Policy

Journal of Monetary Economics, 2025 [Working Paper Version] [Online Appendix]

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.

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

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

Revise & Resubmit at the Journal of International Economics

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.

A Model of Money and Costly State-Contingent Contracts [June 2025]

Reject & Resubmit at the Journal of Economic Dynamics and Control

We develop a model of money and state-contingent contracts to study their interactions and the implications for monetary policy. In the model, financial intermediaries design contracts for individuals facing preference shocks that determine their desired level of consumption. Each individual's preference shock is private information and costly for intermediaries to verify. Financial intermediaries endogenously issue state-contingent contracts. However, asymmetric information and verification costs generate an incentive problem, leading to inefficiency in optimal contracts. We find that, depending on monetary policy, either money or state-contingent contracts are valued, which suggests a perfect substitutability between these two assets.

Liquidity and Monetary Policy with Fraudulent Assets (with Xinchan Lu)

This paper studies the role of money as a safe, fraud-free asset within an environment where asset trading is subject to fraudulent practices. We develop a New-Monetarist model with endogenous costly fraud and screening, which jointly determine the presence of fraudulent assets as well as liquidity. Without money, fraud arises in equilibrium when the costs of fraud and screening are sufficiently low. This occurs as random screening acts to relax the asset resalability constraint that normally prevents fraud from occurring. Money can substitute for random screening as a device to relax the asset resalability constraint, and thus, fraud never arises when money is valued. The model highlights monetary policy implications for fraud incentives and asset liquidity.

Works in Progress

Default Risk and Liquidity Provision of Sovereign Debt (with Federico Guzman)

Publications

Negative Nominal Interest Rates and Monetary Policy

Journal of Monetary Economics, 2025 [Working Paper Version] [Online Appendix]

International Effects of Quantitative Easing and Foreign Exchange Intervention

Journal of International Economics, 2023 [Working Paper Version]

Working Papers

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

Revise & Resubmit at the Journal of International Economics

A Model of Money and Costly State-Contingent Contracts [June 2025]

Reject & Resubmit at the Journal of Economic Dynamics and Control

Liquidity and Monetary Policy with Fraudulent Assets (with Xinchan Lu)

Works in Progress

Default Risk and Liquidity Provision of Sovereign Debt (with Federico Guzman)