Three essays in financial frictions

He, Sicheng
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My dissertation studies how financial frictions affect economy, especially macroeconomy.

Chapter 2 studies the potential for rational bubbles in the innovation sector to affect long term economic growth. We show that stock market prices of R&D firms could include a bubble component when credit constraints are present. Bubbles are self-sustained in equilibrium by a "liquidity" premium that originates when credit constraints are relaxed. Bubbles expand borrowing and production capacity of R&D firms, stimulate innovation and increase the growth rate. Bubbles are magnified by tighter credit constraints and scarce investment opportunities. Finally, we show that bubbles can create permanent reallocation effects benefiting the innovation sector over other sectors.

Chapter 3 uses a generalized Kiyotaki and Moore model (1997) with collateral and cash-in-advance constraints to study the effects of financial and non-financial crisis and the effects of monetary policy both in the short and the long run. We then characterize optimal monetary policy in the Ramsey sense. We find that in the long run, the optimal monetary policy drives the social, but not the individual, shadow price of the collateral constraint to zero. This translates into a generalized version of the Friedman's rule, one that takes into account the degree of credit tightening. In the short run, optimal monetary policy is counter-cyclical, significantly offsetting the effects of financial shocks and reducing the welfare loss of the shocks.

Chapter 4 studies the dynamics of blockchain innovation, adoption and competition in the global payment industry in the presence of a traditional technology. We build a theoretical model with network effects to study the possible evolution path of the payments industry, how a particular technology can gain and lose its market share and whether there exist some technology which can maintain its dominant power. We also study the role of bubbles, and show that they have positive and negative effect on the social welfare.

Bubbles, Financial Frictions, Monetary Policy, R&D