Three essays on credit and the monetary business cycle

The first chapter “Inventory Behavior, Credit Constraints, and the Monetary Transmission Mechanism” studies how monetary policies affect inventory behavior. We incorporate both input and output inventories into an inventory-in-the-production-function framework and allow for heterogeneity among firms in their access to credit. The major contribution is that we develop the first explicit dynamic general equilibrium model that accounts for two important features of inventory behavior following a monetary contraction: (1) The decline in input inventories is much larger than the decline in output inventories; (2) Credit-constrained firms shed inventories more quickly and sharply than non-credit-constrained firms.; The second chapter “The Working Capital Channel and Cross-Sector Comovement” (with Zhixiong Zeng) studies cross-sector comovement of output, employment, and investment, which is one of the defining characteristics of the business cycle. Unlike previous studies that are confined within the real business cycle framework, we introduce money into a two-sector business cycle model and postulate that firms need to borrow to finance their working capital and investment expenditures. We show that a positive money supply shock or technology shock drives the nominal interest rate down, thereby stimulating firms' borrowing and causing employment and investment to rise in both sectors.; The last chapter “On the Local Interaction of Money and Credit” (with Ted Temzelides) studies the coexistence of monetary and credit transactions in a model where exchange is decentralized. Agents belong to different villages which are informationally separated. The frequency of meetings between villages decreases in their geographic distance. The equilibrium mix of monetary and credit transactions is characterized as a function of the frequency of meetings among agents. Our economy may be interpreted as a medieval economy. Trade takes place only among a small set of nearby villages via the use of credit. Monetary trades emerge only after interactions with faraway villages become sufficiently frequent. Even in that case, trades among nearby villages remain non-monetized.