Essays on Information Frictions and Liquidity in Macroeconomics

This dissertation consists of three essays on information frictions and liquidity in macroeconomics.;The first chapter introduces a form of bounded rationality called adaptive learning in a news-driven economy in order to better explain the depth and persistence of recessions. In doing so, this paper adopts expectational stability ("E-stability") as a natural criterion for rationality. In examining the model's stability properties, I find that when agents do not observe current state variables when forming expectations, the rational expectations equilibrium (REE) is not learnable for calibrated parameter values capable of generating news-driven recessions.;The second chapter develops an information-based theory of international currency based on search frictions, private trading histories, and imperfect recognizability of assets. Using an open-economy search model with multiple competing currencies, the value of each currency is determined without requiring agents to use a particular currency to purchase a country's goods. Strategic complementarities in portfolio choices and information acquisition decisions generate multiple equilibria with different types of payment arrangements. While some inflation can benefit the country issuing an international currency, the threat of losing international status puts an inflation discipline on the issuing country. When monetary authorities interact in a simple policy game, the temptation to inflate can lead optimal policy to deviate from the Friedman rule.;The third chapter is joint work with Sebastien Lotz and studies the choice of payment instruments in a simple model where both money and credit can be used as means of payment. We endogenize the acceptability of credit by allowing retailers to invest in a costly record-keeping technology. Our framework captures the two-sided market interaction between consumers and retailers, leading to strategic complementarities that can generate multiple steady-state equilibria. In addition, limited commitment makes debt contracts self-enforcing and yields an endogenous upper bound on credit use. Our model can explain why the demand for credit declines as inflation falls, and how hold-up problems in technological adoption can prevent retailers from accepting credit as consumers continue to coordinate on cash usage.