Three essays on financial macroeconomics
Saunders, Drew Donald
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I study financial arrangements that arise in economies with limited enforcement. Contractual promises are required to be rational for the obligated party at the time of fulfillment. Common also to each environment is perfect information. I study each economy in general equilibrium with competitive markets. In the first chapter, I study the provision of liquidity by one cohort of private agents to another building on the three-period model of Holmstrom and Tirole (Journal of Political Economy, 1998). Entrepreneurs issue financial liabilities to finance liquid investment. As a precaution against a random cost shock, entrepreneurs optimally buy, hold, and then sell a security that they cannot issue themselves. In contrast to Holmstrom and Tirole, I do not allow government liabilities to serve this purpose. Instead, I require that entrepreneurs liquidity needs be satisfied endogenously by circulation of third-party liabilities. The appropriate liabilities sell at a price premium relative to securities that do not serve the liquidity need. Liquidity uncertainty can distort production allocations among producers with different risk characteristics, and I show how issuers of circulating liabilities may be interpreted as banks. The second chapter presents an infinite time-horizon exchange economy wherein default cannot be punished by complete banishment from markets. An asset exists in the economy that cannot be confiscated, and that agents can never be prevented from trading. The payoff to an agent in default is a function of present and future prices and the agents ownership share of the non-collateral asset. Greater ownership implies a higher payoff upon default; but a higher default payoff reduces trading opportunities in equilibrium. Equilibration may generate volatile time-series for endogenous variables. I document the quantitative implications by computing equilibria of a plausibly calibrated economy. In the last chapter, I study the ability of a simple limited enforcement economy to explain arbitrary panel consumption data. Subject to satisfaction of mild inequality restrictions, if the consumption allocation implies that each agents wealth is finite, there is a feasible punishment institution that induces the data in equilibrium. The result shows that limited enforcement economies hold significant potential to explain anomalous features and implications of such data.