Essays on Imperfections in Money and Capital Markets

The first essay explores the demand for M1, M3 and broad money (BM) and economic uncertainty in Australia over the period 1976:2-2008:4. The results suggest that we have evidence of cointegration between money, economic activity, interest rate and price for the pre-deregulation sub-period. The long-run equilibrium relation is confirmed for post-regulation and for the entire sample once we augment the traditional money demand equation with measure of economic uncertainty. Once we account for uncertainty, the breakdown of the cointegration relationship between real money balance and economic activity disappear and our money demand equation better explain the overshooting of M3 during 1984. Our result has an implication on reopening an important policy question on the viability of framing monetary policy around monetary aggregate. The second essay investigates the impact of financial liberalization on consumption and GDP growth volatility and assess why such impact may differ across countries. We have strong evidence that liberalization is associated with lower consumption growth and output growth volatility. Our result confirms that the initial level of inequality and initial level of financial development help to explain heterogeneity across countries. Countries with better financial development benefit from reduction in consumption growth variability. On the other hand, countries with high initial level of inequality do experience an increase in consumption growth volatility. Overall, after controlling for institutional quality, macroeconomic reform and conflict, our result supports the negative association between financial liberalization and consumption growth volatility in subsequent periods. One possible implication of our result is that an effort to improve financial development and promote redistribution policy that reduces the level of inequality, help countries to reap the potential benefit of liberalization. The third essay presents a two-period model of money-in-the-utility-function to investigate the impact of ant-money laundering policy on crime. Our two- period model reveals that an increase in labor wage in legal sector unambiguously decrease the labor hours allocated for illegal sector by increasing the opportunity cost for illegal activities. However, the crime-reducing impact of anti-money laundry regulation and the probability of the agent to be caught require both parameters should be above some threshold. This threshold is a function of the marginal rate of substitution of `dirty\u27 money for consumption and the responsiveness of illegal income to the policy parameter. Higher threshold implies the need for tougher anti-money laundry regime. Therefore, the marginal rate of substitution between `dirty\u27 money and consumption, and the elasticity of illegal income to the policy parameter are the key in governing the formulation of the anti-money laundry policy