Three Essays on Asset prices, Credit Risk, and Monetary Policy
Date Issued
2011
Date
2011
Author(s)
Chang, Tien-Huei
Abstract
The dissertation consists of three essays. Chapter 1 indicates the introduction. In chapter 2, we study the dynamics of capital flows and the fluctuations of domestic land prices and outputs when the economy is open to foreign capital. Following Iacoviello (2005) and Aoki et al. (2007), we build a general equilibrium model in which foreign capital affects the economy through interactions between collateral constraints and asset prices. Both households and entrepreneurs are subject to collateral constraints, and collateralizable assets for international borrowing are more restricted than domestic borrowing. We find that opening to foreign capital brings about larger fluctuations in economic aggregates, such as consumption, output, and asset prices. Furthermore, financial deepening plays a significant role in determining the dynamics of economic aggregates upon various shock impacts. Compared to a closed economy, an increase in the financial institution development raises not only the immediate impact but also the persistence of an exogenous shock. We also conduct welfare analysis based on Schmitt-Grohe and Uribe (2004) by evaluating the expected lifetime utility functions of households and entrepreneurs up to the second order approximation. The result suggests that monetary policy should strongly respond to changes in asset prices in this environment.
In chapter 3, we examine the marginal effect of collateral on the probability of default. Linking a panel of Taiwan''s loan transactions with individual firms'' financial information from 1995-2008, this study uses propensity score matching to measure the difference in default probability between collateralized and non-collateralized loans to control for the sample selection problem. After controlling for sample selection bias, the difference in the marginal effect of collateral on default probability for the two groups ranges from 2.8% to 3.9%. Though statistically significant, the difference is substantially lower than a conventional logit model implies. After splitting the sample into two sub-periods according to the house price cycle ("bust," 1995-2001 and "boom," 2002-2008), the former shows no difference in the marginal effect of collateral on default probability between collateralized and non-collateralized loans. However, the latter sub-period shows a significantly larger difference between the two groups, ranging from 4.1% to 5.7%. The data indicate that lending standards were lower during the boom phase of the house price cycle, and imply that lower lending standards during housing-market booms may inevitably pave the way for a higher credit risk.
In chapter 4, for a small open economy, the exchange rate policy of the central bank is no less important than the interest rate policy in affecting the economy, and the policy is usually conducted through foreign exchange intervention. In this chapter, we investigate the central bank''s reaction functions of both of the interest rate and foreign exchange intervention for a small open economy, using Taiwan as an example. The reaction functions are derived from the model where the central bank minimizes fluctuations in key macro variables. When facing the fluctuations of the exchange rate, central bank''s foreign exchange intervention would have feedback effects on the exchange rate itself. Therefore, the functions are then estimated by a two-regime TAR with endogenous threshold model based on Kourtellos et al. (2007) where the regimes are determined by the speed and the direction of change of the exchange rate. Results show that the interest rate policy mainly reacts to expected inflation and there is no evidence of threshold effects. On the other hand, we find strong evidence of asymmetric responses of intervention to changes in output, exchange rate, and inflation and the responses are shaped in favor of promoting exports. Chapter 5 concludes the findings in the previous chapters.
Subjects
DSGE
Financial Deepening
Collateral
Welfare
Sample Selection Bias
Probability of Default
Propensity Score Matching
Reaction Function
Foreign Exchange Intervention
Threshold Regression with Endogenous Threshold Model
Type
thesis
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