Essays on Money, Business Cycles and Household Formation

This dissertation consists of three independent essays in Macroeconomics. The first essay studies whether efficiency can be improved by introducing government-issued illiquid bonds to an economy where money is the only asset and essential. In contrast with perfectly liquid bonds, illiquid bonds can increase societal welfare in two ways: First, allocating consumption goods among heterogeneous agents more efficiently; second, stimulating consumption and output level by loosening the liquidity constraints of households. More importantly, since societal welfare is elevated persistently when the inflation rates range from a level slightly above Friedman Rule to an upper bound, this essay provides an insight into the essentiality of illiquid bonds. The second essay provides a novel propagation mechanism of productivity shocks to explain an empirical fact: The response curve of output to a positive productivity shock reaches its peak up to eight quarters after the shock. Using a micro-founded monetary search model and focusing on agents’ decisions on establishing long-term trading relationships in the goods market, I show that when a positive shock takes place in the economy, marginal agents break down previous trading relationships and explore better matching opportunities. As a result, shortly after the shock, the average productivity level of transactions increases, but the total number of transactions decreases. The calibrated model shows that the latter effect dominates, resulting a slightly decrease of aggregate output after a positive productivity shock. The search friction, together with the monetary channel, gives rise to a delayed output response at the aggregate level. The third essay develops a general equilibrium theory of household formation – i.e., marriage – following Coase’s theory of firm formation. Individuals in the model consume both market-and home-produced commodities, and home production is facilitated through marriage. Market frictions, including taxation, search and bargaining problems, increase marriage rates when home and market goods are substitutes. In particular, inflation, as a tax on market activity, makes household production and hence marriage more attractive, as long as singles use cash more than married individuals, which is supported by data. The prediction that inflation and other taxes affect household formation is also supported by evidence.Ph