Essays on Market Imperfections in Macroeconomics and Finance

Abstract

This collection of essays investigates the quantitative impact of market imperfections on three key areas in macroeconomics and finance: asset prices, household consumption, and credit allocations. Chapter 1 provides a quantitative explanation of the Chinese housing boom, based on the interaction of liquidity constraints in the housing market and the transition of household wealth from a low initial condition. This explanation, motivated by an examination of the cross-city pattern in the extent of the housing boom, generates, in a model without bubbles, a faster-than-income increase in housing prices and a speculative motive for holding housing as a store-of-value, and predicts a natural slowdown in housing appreciations. This chapter also serves as an example in which market imperfections generate particularly large effects on asset prices and household portfolio choice. Chapter 2 carries out a test for standard life-cycle incomplete-markets models where households are restricted to trading risk-free bonds. Using household microdata for the US, I provide evidence for a key unverified prediction of this class of models, that there should be large cross-sectional differences for age and wealth in agents’ consumption responses to long-lasting income shocks. Furthermore, I find that a calibrated standard life-cycle incomplete-markets model predicts heterogeneity in consumption responses that are quantitatively similar to my empirical estimates. Chapter 3, coauthored with Cheng Sun, estimates the differential responses in firm borrowing to monetary easing and tests two theories of the redistributive role of monetary policy, the “excess sensitivity” hypothesis of Gertler and Gilchrist (1993) and the “risk-taking channel” of monetary policy, in the context of a large developing economy. We exploit a comprehensive loan-level database from a major Chinese bank covering 10% of all loans to firms in China, with detailed borrower information. We find that smaller firms and firms with lower risk ratings experience larger increase in the size of new loans. This is more supportive of the “excess sensitivity” hypothesis of Gertler and Gilchrist but not the “risk-taking channel” of monetary policy. This suggests that the nature of the relationship between monetary policy and risk-taking can be complex and context-dependent.