Financial Market Frictions, Beliefs, and the Macroeconomy; An Application to the Case of China

点击翻译按钮获取中文摘要

Project 1: "Limited Commitment and the Effects of Monetary Policy"In this project, we will study how financial frictions affected by beliefs of market participants, and the implication for monetary policy (such as a change in interest rates on productivity and growth). The expansionary monetary policy (higher money supply growth or easier lending conditions) in China after 2011 did not have the same expansionary effects on inflation and output as in the previous years. We will study how the presence of a particular type of frictions, limited commitment, significantly affects the impact of monetary policy and can explain the different effects observed in recent years. This study could shed light on the conduct of monetary policy, which will depend on the beliefs in the credit market and the firm size-productivity distribution.Project 2: "Search-and-matching for Liquidity in Financial Markets and Government Policies"According to World Bank data, between 2000 and 2013 in China, the quantity of money (M2) grew at a yearly rate of 16.2%: in the same period, the average yearly inflation rate was 2.4%, and the average yearly real GDP growth rate 8.7%. This means that, even after taking into account the high real GDP growth, the inflation rate in China has been systematically lower than what one would expect on the basis of the money supply growth rate.Chinese financial markets are still not fully developed, and many privately issued assets are not very liquid. As a result, besides the transaction motive, economic agents' hold money also because of liquidity needs. The purpose of this project is to study how the higher liquidity needs (due to the low liquidity of the financial markets) affect the relations between monetary policy, inflation and economic growth, when beliefs about liquidity affect market participations. We will apply the study to understand the Chinese practice mentioned in the beginning, and discuss whether it is sustainable. We will study these issues by introducing asset liquidity frictions in an otherwise standard macroeconomic framework. In contrast to exogenous asset liquidity, expressed by a fixed fraction of assets sellable in a given period, endogenous asset liquidity is micro-founded and suitable for policy analysis. Project 3: "Long Run Herd Behaviour and Volatility Clustering in Financial Markets"In the third project, we turn to another form of financial frictions, asymmetric information. Financial markets are crucial for good investment decisions. The ability of prices to aggregate dispersed information is fundamental for an efficient allocation of resources. We will study the informational efficiency of the Chinese financial markets through the use of novel financial markets models, with a specific focus on learning and herding. We will also study why asset prices exhibit time-varying volatility and the extent to which this is related to herd behaviour. We will then estimate the models using transactions data for the Chinese stock exchanges obtained from Wind Info. The structural estimation will allow us to quantify the drivers of herding and asset prices' time-varying volatility and their effect on market efficiency.