[1] Endogenous Liquidity and Volatility (with Guillaume Rocheteau) [SSRN Link]
Journal of Economic Theory, Vol. 210, June 2023, 105652
Abstract: Is asset liquidity a source of price volatility? We answer this question within a continuous-time, New Monetarist economy under extrinsic uncertainty where the role of an asset to finance expenditure shocks depends on its pledgeability. If assets are intrinsically valuable and pledgeability is exogenous, then their prices are invariant to extrinsic uncertainty – unlike environments with discrete-time pricing that can feature sunspot equilibria. We derive conditions under which extrinsic uncertainty matters when pledgeability is endogenous and varies with the asset price or its rate of return. In the latter case, we link sunspot equilibria to deterministic cycles.
[2] Hysteresis in Asset Liquidity (Job market paper)
Abstract: This paper examines the dynamics of asset acceptability as means of payment or settlement in transactions, focusing on how certain assets shift from limited use to widespread acceptance gradually over time. Building on prior studies of search and information frictions, I introduce a general equilibrium model that represents acceptability as a slow-moving state variable, shaped by agents’ investments in time and resources. Within a dual-currency framework, I show that domestic inflation can prompt agents to adopt foreign currency, creating a social habit that reinforces its use. This habit often persists even after inflation stabilizes, leading to a self-reinforcing cycle of dollarization that is difficult to reverse. The model highlights how temporary economic shocks can produce lasting effects on currency choice, offering a new perspective on hysteresis in currency acceptance and its policy implications.
[3] Intermediaries, Inventories and Endogenous Dynamics in Frictional Markets (with Chao Gu and Randall Wright)
R&R at the Journal of Economic Theory
Abstract: We study dynamics in frictional markets with inventories, focusing on models with intermediated trade, where middlemen buy assets or goods from sellers and sell them to buyers. Extending previous work, we include heterogeneous buyer valuations, and develop a characterization of equilibrium in terms of reservation trading strategies (homogeneous valuations imply bang-bang solutions with discontinuities that are awkward for the economics and mathematics). In continuous or discrete time, equilibria exist where market participation, trading strategies, liquidity, and other variables fluctuate as self-fulfilling prophecies. This is driven by strategic considerations, not increasing returns or related assumptions made in other models.
[4] Dynamics of Market Power in Monetary Economies (with Jyotsana Kala and Lucie Lebeau)
R&R at the European Economic Review
Abstract: We extend Choi and Rocheteau (2024) to study the dynamic interplay between monetary policy and market power in a decentralized monetary economy. Our key innovation is to model rent-seeking as a process that takes time, allowing market power to evolve gradually. Consistent with the stylized correlation observed over the last few decades in the US, a gradual reduction in the nominal interest rate increases rent-seeking effort and producers’ market power over time. Producer entry, however, can invert the effect of monetary policy on market power on impact, and dilute its long-run effect. Indeterminacy and path dependence emerge when consumers benefit from valuable outside options, with monetary policy shocks potentially locking the economy into high- or low-market-power equilibria.
[5] Dollarization and the Dynamics of Dollar Adoption
Abstract: This paper examines the dynamics of currency adoption in the context of official dollarization, with a focus on the role of the initial degree of partial dollarization. Using a New Monetarist model, I analyze how the gradual accumulation of dollars through international trade interacts with buyer decisions to hold foreign or domestic currency. I first demonstrate that under perfect commitment to dollarization, while the long-run effects are independent of the initial degree of partial dollarization, short-term outcomes are significantly shaped by it. In contrast, with imperfect commitment—particularly relevant to Argentina's current political landscape—the initial degree of partial dollarization becomes critical, and expectations about the permanence of dollarization impact the conversion process and its effectiveness. I further explore scenarios in which buyers are divided into optimists and pessimists regarding dollarization and derive the minimum proportion of optimists required for the policy’s success. Additionally, I analyze the government’s conversion program, highlighting a multiplier effect where a higher conversion rate (more pesos per dollar) reduces the proportion of peso conversions, exacerbating the dollar shortage and prolonging the dollarization process. Ultimately, the model underscores the importance of government commitment and buyer expectations in shaping the outcomes of currency transition policies.
[6] Rising Market Power in a Decentralized Economy
Abstract: What are the causes and consequences of the increasing trend in market power? This paper revisits this prolem with a New-Monetarist model of decentralized economy with ex-post firm heterogeneity and entry-exit decisions. Results suggest that increasing competition, rather than declining competition, tends to coexists with increasing markups. This relationship is reinforced when there is search frictions, where an increase in either the number of firms or the average productivity of firms increase households' outside options, causing lower quality firms to leave the market. With heterogeneous firms, firms' rent seeking behaviors can be welfare improving.
[7] Duffie-Garleanu-Pederson Meet Rubinstein-Wolinsky (with Chao Gu and Randall Wright)
[8] Stock Market Participation, Liquidity, and Monetary Policy (with Aaron Sullivan and Sarah Xiao)