Essays on financial macroeconomics and econometrics

Abstract

Chapter 1 considers a heterogeneous agent New Keynesian model with time-varying asset market liquidity. A lesson from the Great Recession is that the difficulty in asset liquidation and the shortage of liquid assets to households can have a substantial effect on aggregate demand. In this paper, I use a Heterogeneous Agent New-Keynesian (HANK) model to quantify the impact of time-varying market liquidity on the monetary transmission mechanism. I document that the effect of monetary policy is amplified through countercyclical response of the liquidation time for illiquid assets. Furthermore, monetary policy generates substantial redistribution across heterogeneous households in my model. Wealthy hand-to-mouth households suffer the most from contractionary monetary policies because of the significant delay in the liquidation process of illiquid assets, whereas agents with enough liquid assets only mildly adjust their consumption. Finally, the model matches the empirical finding that contractionary monetary policies are more powerful than expansionary intervention because more agents become liquidity constrained during recessions. Chapter 2 is an empirical studies on stock market liquidity and aggregate economy. This chapter studies the relationship between aggregate demand and stock market liquidity. I first provide empirical evidence to justify that the stock market liquidity moves around with the aggregate market. I further show that under different levels of stock market liquidity, the economy will react differently to monetary shocks. In particular, monetary policy is more effective if the market liquidity is low.

Date of Award	2022
Original language	English
Awarding Institution	The Hong Kong University of Science and Technology
Supervisor	Byoungchan LEE (Supervisor) & Pengfei WANG (Supervisor)