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Three essays on asymmetric financial access Chu, Yin-Chen

Abstract

This dissertation consists of three essays on issues related to asymmetric financial access in two-country general equilibrium models with sticky prices. The form of asymmetric financial access is in terms of two groups of households: One group has full access to both bond and money markets, while the other is prohibited from bond trade or even monetary adjustments. The first essay is to examine effects of financial asymmetry on economic volatility. It finds that the effects depend on whether, in addition to restrictions on bond trade, you also have restrictions on monetary adjustments, among households who face financial limitation. If financially constrained households are prohibited from bond trade only, then inter-household monetary adjustments serve as a shock absorber and we have similar economic volatility under different degrees of financial asymmetry. If financially constrained households are prohibited from both bond trade and monetary adjustments, then we have positive correlation between degrees of economic volatility and financial imperfection. The second essay is to examine welfare effects of economic uncertainty under financial asymmetry. The welfare measure is defined as how much initial steady-state consumption a household is willing to give up to negate effects of economic uncertainty. The essay finds that lower degrees of foreign financial openness increase welfare loss of financially unconstrained households but decrease welfare loss of financially constrained households. Moreover, welfare loss of both types of households is reduced with lower degrees of home financial openness. It also finds that if financially constrained households are prohibited from both bond trade and monetary adjustments, then welfare loss of both types of households increases. The third essay is to examine welfare effects of exchange-rate regimes under financial asymmetry. It is assumed that governments fix their money supply at initial steady-state levels in the flexible exchange-rate regime, while coordinating their monetary policies to maintain the exchange rate level in the fixed exchange-rate regime. The welfare measure is defined as expected utility excluding the term associated with real balances. The essay finds that under financial asymmetry, fixed nominal exchange rates are in many cases preferable to flexible nominal exchange rates by both types of households. For financially unconstrained households, wealth effects associated with the monetary policies that aim to maintain the exchange rate level can dominate the welfare cost of fixed nominal exchange rates. For financially constrained households, they can not enjoy the benefit brought by expenditure switching effects due to their financial restriction, but need to bear the associated cost of higher economic variability. Therefore by reducing expenditure switching effects, the fixed exchange-rate regime can increase their welfare.

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