This thesis consists of three chapters. In Chapter 1 we construct a monetary model based on Lagos and Wright (2005) where unsecured credit and money are used as means-of-payments, and we analyse how the cost and the quality of record-keeping technology affect welfare. We show that a higher credit limit does not necessarily improve welfare, especially when the limit is high: the benefit from increased trade surpluses from a higher credit limit is offset by the increased cost of monitoring to achieve the improvement. Moreover, under the optimal arrangement, optimal credit limit decreases with the marginal cost of monitoring. In Chapter 2 we construct a monetary model with both formal and informal sectors to study optimal monetary policy and fiscal policy under needs for public goods. We show that the optimal monetary policy depends on the size of the informal sector. Specifically, the inflationary policy is socially optimal only when the informal sector is larger than a certain threshold; otherwise, it is optimal to choose a deflationary policy. In Chapter 3 we present a micro-founded model with bank deposits used as the means of payment. We show that in the absence of government intervention, the private sector may not provide sufficient liquidity if the productive asset is scarce. As a result, interventions, such as interest on reserves and reserve requirements, may increase welfare by improving liquidity supply.
Essay on money and credit with limited commitment
Liu, Y. (Author). 21 Jun 2022
Student thesis: Doctoral Thesis › Doctor of Philosophy (PhD)