| These essays provide a better understanding of how frictions and intermediation affect individual decision making and the resulting effect on aggregate outcomes. The first chapter extends existing search-theoretic models of monetary exchange, and uses the framework to explore the following applications. First, I show how to endogenize the supply of liquidity in a simple (one-country) model where commodity money can be created, through mining, and also consumed, say melted. Second, I develop an explicit multi-country version of the model that determines how liquidity is allocated across economies that share the same currency. Finally, I present a version of the model where the circulation (or non-circulation) of both an international currency and a local currency are endogenous, and use it to discuss dollarization. The implications of the analysis are similar on many dimensions to more traditional theories, such as Hume's price-specie flow theory, or Mundell's monetary theory of the current account. However, in the current framework the role for money has explicit microfoundations based on frictions in the trading process. At the same time, as compared to existing search-based models in monetary economics, the current framework is much more natural and also much more tractable. The second chapter quantifies the effects of a mechanism that may contribute to housing investment leading output, as it does in the post World War II United States Economy. The mechanism explored is the inter-play between aggregate uncertainty and individual uncertainty along with frictions in the housing market such as transaction costs. These effects imply that a potential homebuyer would be very reluctant to buy a house when a recession hits, but enthusiastic at the start of an expansion, so that there are large swings in housing investment when expectations of future earnings and interest rates shift. Results show that this effect is small compared to the effects from interest rate changes. |
