Three Essays On Financial Development Consumption Risk Sharing And New Keynesian Price Setting Model

Abstract: The first chapter investigates the effects of inflation, accessibility and depth of credit markets on wealth distribution. We find that from 1995 to 2002 in China, the inequality of wealth distribution decreased, the money-wealth ratio increased for all wealth levels and the aggregate money-output ratio increased. We develop a two-asset dynamic general equilibrium model in which households face a portfolio-adjustment cost and a borrowing constraint. The accessibility and depth are measured by the portfolio-adjustment cost and the borrowing constraint, respectively. Model calibration based on the Chinese data shows that the portfolio-adjustment cost was reduced and the borrowing constraint was relaxed from 1995 to 2002. We find that financial development lowers the inequality of wealth distribution by reducing the precautionary motive of households. In addition, tight monetary policy increases the value of money and, in turn, raises the money-wealth ratio for all wealth levels and the aggregate money-output ratio. The second chapter examines inter-provincial consumption risk sharing and intertemporal consumption smoothing across Chinese provinces before and after the 1979 economic reform. Our results indicate that the degree of consumption risk sharing among Chinese provinces is lower than that within the U.S. and across the national boundaries of OECD countries. On the other hand, the level of consumption smoothing among Chinese provinces is higher than that across OECD or EU countries, but lower than that in the U.S. Moreover, our results show that consumption risk sharing and smoothing in China have deteriorated since the 1979 economic reform. Finally, we show that eliminating consumption fluctuations yields substantial welfare gains, which suggests that stabilization policies are desirable for China. The third chapter compares continuous and discrete time sticky price models. For given menu costs, continuous time models imply shorter average contracts but larger real effects of inflation.