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On Macroeconomics and Dynamic Incentives

Date of Award

Spring 5-15-2012

Author's School

Graduate School of Arts and Sciences

Author's Department


Degree Name

Doctor of Philosophy (PhD)

Degree Type



Chapter 1: A New-Monetarist Phillips Curve

Standard monetary models with labor search cannot generate the empirical correlations, in particular among unemployment, inflation and the nominal interest rate, in both the short run and the long run. On the other hand, standard market-segmentation models cannot generate enough persistence, in particular of inflation. We propose a model with labor search and market segmentation, which can rightly complement each other to overcome these shortcomings. A temporary shock (short-run) to money growth causes the intensive-margin effect on employment, and reduces the unemployment rate and the nominal interest rate. A permanent shock (long-run) to money growth raises the unemployment rate and the nominal interest rate instead. Calibrated to the standard U.S. economy, shocks to money growth and productivity can generate enough persistence of inflation and unemployment in the correlation shown in the data, as a result of the extensive-margin effect on employment and market segmentation. Monetary shocks explain the volatility and persistence of nominal variables, but also their correlations with real variables. The optimal money growth, which is not unique, minimizes the distortion from labor-market frictions, and eliminates the intertemporal monetary distortion and the market segmentation frictions

Chapter 2: Dynamic Defined-Contribution Pension Design with Adverse Selection and Moral Hazard

We study voluntary defined-contribution pension contracts with the incentive problem of early retirement and low contributions over time. Agents are free to retire, quit a plan and choose between plans. The fluctuation of labor productivity throughout working life and the length of working life are private information. The optimal contract can be implemented through transfers (sometimes negative) and contribution deductions from agents' pensions over time. The optimal contract features a punishment phase, an accumulation phase and a retirement phase. We found that the amount of pension is higher under the optimal contract than under laissez faire. Working agents enjoy higher consumption, contribute less, and retire later. The result is robust to different environments.

Chapter 3: Liquidity Crises and Regulations with Endogenous Financial Intermediary: Implications on Liquidity, Haircut and Asset Price

This paper studies the contracting between a borrower (also a buyer) and a competitive financial intermediary, and its implication on the haircut, asset price and balance sheets in an equilibrium (possibly multiple). Financial intermediaries can create liquidity by backing an IOU with borrower's assets. The return of asset is private information to the borrower, but the financial intermediary can verify with a cost. The financial intermediary provides a loan contract which specifies the haircut and interest payment (or repo price) based on the secured asset. We found both haircut and asset price are monotone in the borrower's commitment power and the cost of monitoring. However, we show when the commitment power is too high or the cost of monitoring is too low, then multiple equilibria exist: one captures a liquidity crisis. We also show how various financial regulations can or cannot rule out the liquidity crisis.


English (en)

Chair and Committee

Stephen Williamson

Committee Members

Rodolfo Manuelli, Costas Azariadis, Yongseok Shin, B. Ravikumar, Yili Chien


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