2. Working Papers

1. Negative Interest Rates: How Low is the Effective Lower Bound?

I construct a model of credit, money, and theft that solves the zero lower bound (ZLB) problem by relaxing the bound. In this paper, the cost of using currency against the central bank deposits determines to what degree interest rates might go negative while the liquidity management mechanism determines how the negative rates are adopted. Three relevant experiments are conducted: a central bank adopts (i) a corridor system with negative deposit rate and positive policy rate as currently employed in Norway; (ii) a corridor system with negative deposit and policy rates as in Sweden; and (iii) a floor system with negative deposit rate as in Denmark and the euro area. Lastly, a monetary policy change has different qualitative effects under a corridor system than under a floor system.

2. A Unique Monetary Policy Framework: Secondary Floor with a Floor System

I develop a model of the non-standard floor system to capture the current U.S. monetary policy issues. This paper has novel predictions on the Fed's on-going balance-sheet normalization program: as the financial frictions are sufficiently weak, a balance-sheet reduction (i) implies a larger welfare, (ii) diminishes the share of fed funds borrowed by foreign banks, (iii) induces the interbank lenders to swap government debts for fed funds, and (iv) shifts the monetary policy framework to a standard floor system in which the reverse repo facility becomes redundant.

3. Role of Housing: Collateral, Medium of Exchange or Merely a Shelter?

I study limited commitment, imperfect recordkeeping, and costly collateral frictions that determine to what extent a housing is useful as collateral instead of a medium of exchange. This paper has three contributions: (i) since a housing trade leaves a home unoccupied, the waste of housing services leads to an efficient use of collateral. However, once collateral becomes scarce---as it did in the financial crisis---then households trade homes to make up for weak incentives in collateral; (ii) a collateral fee creates an additional friction to the extent that a fraction of homes is neither traded nor collateralized, but used only for housing services; and (iii) optimal monetary policy never drives out the credit, however too much deflation and the costs of collateral lead to a default on tax payments. Lastly, these findings can be used to deduce what types of assets make good collateral in practice.

4. Shadow Banking, Capital Requirements and Monetary Policy

I construct a Lagos-Wright model in which financial intermediation incorporates costly-state verification and delegated monitoring, and banking is founded on risk sharing. In contrast to the traditional banking system, the shadow banking system is not subject to capital requirements. Given lack of regulation, a shadow bank has a comparative advantage over a traditional bank with respect to loan creation associated with the entrepreneurs' projects. As the cost of operating a shadow bank increases, the liquidity originated by shadow banks declines and traditional banks partially fill the void by financing new projects. I carry out three experiments exploring the effects of financial crisis shocks on real activities. A decrease in interest rate on reserves increases currency outstanding and loan creation capacity in each sector; however, the improvement might be stronger at the shadow banking than the traditional banking. Lastly, the central bank's purchase of private assets transfers the credit from traditional banking to shadow banking when the shadow bank cost is sufficiently small.