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Title: Dynamic stochastic general equilibrium models with money, default and collateral
Author: Ahn, Kwangwon
ISNI:       0000 0004 2057 6752
Awarding Body: University of Oxford
Current Institution: University of Oxford
Date of Award: 2013
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This D.Phil. dissertation investigates the areas in financial stability. The three comprising essays have a common ground: money, default and collateral in the theory of finance. Chapter Two (co-authored with Prof. Dimitrios Tsomocos), which is titled “A Dynamic General Equilibrium Model to Analyse Financial Stability”, aims to refine and improve existing DSGE models in two ways. First, it incorporates hitherto neglected components such as endogenous default, money via cash-in-advance constraints and heterogeneous banking sectors. Thus, in contrast to the New Keynesian approach, here it is liquidity and default that are the driving forces behind our results. Second, in focusing on both monetary policy and fiscal policy, it elucidates how interactions between the two policy arenas affect macroeconomic fluctuations, particularly in regard to financial stability. Through these refinements, we put forward the policy response necessary to achieve a stable financial system using a calibrated DSGE model. Chapter Three, entitled “Monetary Policy in a Time of Natural Disaster”, investigates the appropriate monetary policy response to natural disasters in the DSGE framework. I develop a realistic model for financial turmoil by evaluating the impact of natural disasters on credit markets by including financial frictions such as endogenous default and liquidity constraints. I show that the standard Taylor rule (1993) response in models with money and default is to increase the nominal interest rate after a disaster shock. However, in fact an inflation-targeting policy (i.e. monetary contraction) is not compatible with mitigating financial fragility in the highly indebted economy with near-zero interest rate, and arguably the `Taylor Principle' does not hold in such as economy (e.g. Japan in 2011). Nevertheless, expansionary monetary policy induces a debt overhang even further. Chapter Four, “Collateral, Default and Asset Prices”, uses a DSGE framework to put forward a model of how agents adjust their asset holdings in response to deflationary shocks. By introducing collateral constraints in the default decision, I capture some original features of the early debt-deflation literature, such as distress selling and instability. The estimated model successfully delivers a procyclical feedback loop for the default channel, which consists of foreclosure, high borrowing costs, inefficient capital allocation, and a further decrease in the output level. I investigated recessionary shocks inducing deflation in commodity and/or asset prices for monetary policy experiments. This, therefore, underlines the importance of monetary policy in restoring financial stability during a deflationary period.
Supervisor: Tsomocos, Dimitrios Sponsor: Not available
Qualification Name: Thesis (Ph.D.) Qualification Level: Doctoral
EThOS ID:  DOI: Not available
Keywords: Finance ; Financial economics ; collateral ; default ; money ; dynamic stochastic general equilibrium