Essays on credit frictions and incomplete markets
The dissertation is composed by two chapters. In the first one, I study the role of credit constraints and incomplete markets in the short run transmission of monetary shocks, using the superneutrality result that would obtain from preference separability in the Sidrauski model under complete markets as a benchmark. I find that money demand heterogeneity stemming from binding credit constraints invalidates the superneutrality result. I show this result under two alternative settings. In a simple two agents model, with heterogeneity in the rates of time preference, whether positive shocks to the growth rate of money are expansionary or contractionary crucially depends on the transfer scheme adopted by the monetary authority to rebate seigniorage transfers: redistributional effects implied by symmetric lump-sum transfers are contractionary, while wealth-neutral transfers are expansionary. In a model with uninsurable idiosyncratic risk, the approximate aggregation property fails to hold due to the high degree of heterogeneity of money demand and to the properties of the cross-sectional distribution of money holdings, suggesting the inadequacy of the representative agent assumption and the need for a more elaborate approximation of the wealth distribution to predict prices. In the second chapter, we propose a real business cycle model with labor and credit market frictions in which borrowing is conditional on employment status. Relative to a conventional set up, and as long as credit is valued positively, our model generates a non-standard labor/leisure trade off that induces job applicants to accept lower wages and firms to post more vacancies, ultimately increasing employment. A shock to the demand of durable goods, by increasing the collateral value, reduce the opportunity cost of working, and generates an increase in employment and output. The transmission of a financial shock that increases the loan to value ratio, is dampened by the costs, in terms of leisure, incurred by the borrowers. We show that this mechanism is able to generate the positive comovement between outstanding household debt and employment observed in the data, whereas a conventional model, in which employment status is irrelevant for obtaining credit, predicts a counterfactual negative comovement.