Essays on Financial Intermediaries and Liquidity
Date Issued
2012
Date
2012
Author(s)
Lin, Jia-Jing
Abstract
This
dissertation studies liquidity and financial intermediaries in
economies with private information regarding means of payment. We
first consider an economy with an explicit dual role of banks in
providing credit and payment services. Agents can produce fraudulent
checks at a positive cost, and sellers are not able to verify the
authenticity of payments. Banks punish agents passing on fraudulent
checks by not granting loans. Dishonest agents thus need to hold
enough cash to insure themselves against the random consumption
opportunities. The moral hazard problem results in an endogenous
upper bound on the quantity of deposits that can be traded for
consumption goods. Higher inflation can relax the endogenous
liquidity constraint through raising the self-finance cost that
prevents fraudulent activity. As the quantity of deposits that can
be traded for consumption goods is raised by inflation, the
aggregate liquidity and output rise. Our model offers new insights
for the relationship between bank''s dual role, aggregate liquidity
and allocations under moral hazard.
In Chapter 3, we consider an economy with a risky real asset which
can be used as a means of payment in the decentralized market. The
real asset may turn out to be good or bad, depending on their
dividend processes. The quality of an asset is private information
to the asset holder. By investing in real assets and conducting
asset transformation, banks provide deposits and bank equity that
are riskless and fully recognizable to serve as means of payment. In
some equilibria, banks buy all of one type of real assets, which
eliminates the private information problem regarding means of
payment. In other equilibria, there are good assets and bad real
assets in the decentralized market, and the payment arrangement
displays a pecking order: buyers use real assets to make payments
only if their deposits and bank equity holdings are depleted. The
existence of banks is helpful to improve aggregate liquidity and
welfare, even if banks are not able to discern the quality of real
assets. Moreover, when equilibria coexist, the one in which banks
buy all good assets achieves the highest welfare.
Subjects
Means of payment
Liquidity constraints
Private information
Recognizability
Welfare
Financial intermediaries
Type
thesis
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