The steady application of Quantitative Easing (QE) has been followed by big and non-monotonic eﬀects on international asset prices and international capital flows. These are diﬀicult to explain in conventional models, but arise naturally in a model with collateral. This paper develops a general-equilibrium framework to explore QE’s international transmission involving an advanced economy (AE) and an emerging market economy (EM) whose assets have less collateral capacity. Capital flows arise as a result of international sharing of scarce collateral. The crucial insight is that private AE agents adjust their portfolios in diﬀerent ways in response to QE, conditional on whether they are (i) fully leveraged, (ii) partially leveraged or (iii) unleveraged. These portfolio shifts of international assets can diminish or even reverse the eﬀectiveness of ever-larger QE interventions on asset prices. The model provides a simultaneous interpretation of several important stylized facts associated with QE.
We prove that in competitive market economies with no insurance for idiosyncratic risks, agents will always overinvest in illiquid long term assets and underinvest in short term liquid assets. We take as our setting the seminal model of Diamond and Dybvig (1983), who ﬁrst posed the question in a tractable model. We reach such a simple conclusion under mild conditions because we stick to the basic competitive market framework, avoiding the banks and intermediaries that Diamond and Dybvig and others introduced.
We oﬀer new suﬀicient conditions ensuring demand is downward sloping local to equilibrium. It follows that equilibrium is unique and stable in the sense that rising supply implies falling prices. In our setting, there are two goods, which we interpret as consumption in diﬀerent time periods, and many impatience types. Agents have the same Bernoulli utility function, but the types diﬀer arbitrarily in time preference. Our main result is that if endowments are identical and utility displays nonincreasing absolute risk aversion, then market demand is strictly downward sloping local to equilibrium. We discuss implications for the Diamond-Dybvig literature.
Status is greatly valued in the real world, yet it has not received much attention from economic theorists. We examine how the owner of a ﬁrm can best combine money and status to get her employees to work hard for the least total cost. We ﬁnd that she should motivate workers of low skill mostly by status and high skill mostly by money. Moreover, she should do so by using a small number of titles and wage levels. This often results in star wages to the elite performers and, more generally, in wage jumps for small increases in productivity. By analogy, the governance of a society should pay special attention to the status concerns of ordinary citizens, which may often be accomplished by reinforcing suitable social norms.
Much of the lending in modern economies is secured by some form of collateral: residential and commercial mortgages and corporate bonds are familiar examples. This paper builds an extension of general equilibrium theory that incorporates durable goods, collateralized securities and the possibility of default to argue that the reliance on collateral to secure loans and the particular collateral requirements chosen by the social planner or by the market have a profound impact on prices, allocations, market structure and the eﬀiciency of market outcomes. These ﬁndings provide insights into housing and mortgage markets, including the sub-prime mortgage market.