Date of Award

Spring 5-15-2016

Author's School

Graduate School of Arts and Sciences

Author's Department


Degree Name

Doctor of Philosophy (PhD)

Degree Type



My essays that are captured in two chapters of my dissertation focus on shadow banking system, collateralized debt arrangement and monetary policy. The first chapter studies the role of shadow banking in the recent financial crisis, the relationship between shadow banking and traditional banking, and it investigates the monetary policy reaction to overcome the financial frictions associated with the scarcity of collateral or shortages of safe assets that naturally led to the liquidity constraints. On the other hand, the second chapter studies the role of housing as a collateral or as a medium of exchange and it explores how the private liquidity, in the context of home-equity loans, and public liquidity work together to overcome the limited commitment frictions.

In the first chapter, a Lagos-Wright model with costly-state verification and delegated monitoring financial intermediation, and a risk-sharing framework of banking is constructed. Lack of memory and limited commitment imply collateralized credit arrangements. In contrast to the traditional banking system, shadow banking system is not subject to the capital requirements. The relative use of shadow funded credit versus traditional bank loans entails the advantages of working outside the oversight of the bank regulations, but drawbacks of having information and transactions cost in funding entrepreneurs. I have five main findings: First, an entrepreneurial credit can help address the need for collateral. Second, the shadow funded credit shifts from risky to safer borrowers and loan creation capacity of the shadow banking sector shrinks when the economic outlook gets worse. Third, the traditional bank can fulfill the role of providing credit that shadow banks had played before the crisis, but can do it only to a certain extent. Fourth, to the extent that collateral backed by entrepreneurial credit mitigates the limited commitment friction in the traditional banking sector, the optimal monetary policy shifts nominal interest rate towards zero lower bound. Lastly, the quantitative easing program can be welfare increasing by reinforcing the shadow funded credit versus traditional banking lending if the credit frictions in the shadow banking sector are sufficiently small.

The second chapter studies the role of home-equity loan and government debt in an environment with financial frictions. I construct a Lagos-Wright model in which private transactions must be secured under limited commitment and lack of record-keeping. Housing can be useful to support credit since it serves as collateral. It also gives direct utility as shelter and serves as a medium of exchange when the economy is inefficient. I show that when there is no efficiency loss due to exchange of housing, posting collateral is not optimal since collateralizable wealth is limited. In the state of efficiency loss, the collateral might be useful and the asset therefore bears a liquidity premium. However, once collateral becomes scarce - as it did during the financial crisis- then it amplifies the frictions and the buyer trades the asset to make up for the weak incentives associated with collateral. I show that the world is always non-Ricardian and therefore government debt implies higher welfare. As well, government debt enhances the private debt to the extent that posting collateral is always optimal. In equilibrium, full pledgeability of private collateral, in addition to government debt, completely rules out the efficiency loss arising from exchange of asset. Money and private banks are introduced. I show that as inflation imposes a tax on consumption, interest rate on cash loans imposes a tax on housing collateral. Finally, an increase in inflation raises the housing price near Friedman Rule.


English (en)

Chair and Committee

Stephen Williamson

Committee Members

Gaetano Antinolfi, Costas Azariadis, George-Levi Gayle, Limor Golan,


Permanent URL:

Included in

Economics Commons