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Essays on financial policy and macroeconomics

Osorio-Rodriguez, Daniel (2014) Essays on financial policy and macroeconomics. PhD thesis, The London School of Economics and Political Science (LSE).

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Abstract

This thesis delves into the nature and effects of financial and monetary policy design. It comprises three chapters, each of which studies this topic from a different perspective and with a focus on different frictions. The first chapter derives theoretically the optimal monetary policy for a small open economy characterized by the incompleteness of the domestic financial market. In the model, a tight relationship between the consumption of different agents and the aggregate debtto-GDP ratio emerges in equilibrium. Optimal monetary policy is the result of a tradeoff between the stabilization of this ratio (risk-sharing) and the traditional policy objectives of price and output gap stabilization. Quantitative simulations suggest that price and output stabilization dominate debt-to-GDP stabilization in the optimal policy rule. Unlike the case of a closed economy, the policy objective of improving on risk-sharing is excessively costly from the point of view of the policymaker when the economy is open. The second chapter studies theoretical issues related to the unsecured consumer credit market, normally characterized by incompleteness and poor protection of property rights. The chapter describes a theoretical mechanism by which the interest rate to a given borrower is affected by the default choices of other agents. Individual agents ignore the effect of their own default choices on aggregate credit conditions, and thus the volume of unsecured credit in a decentralized market will be generally inefficient. The chapter employs simulations of the model to conclude that recently observed credit booms in Latin America may be inefficient. The third chapter analyzes empirically the relationship between information sharing and credit outcomes in the unsecured consumer credit market, focusing on the potential expost disciplinary effect and the ex-ante informational hold-up of long-lived negative information about borrowers. The chapter exploits a natural experiment in Colombia created by Law 1266/2008, whereby detailed information about past defaults that were exogenously “sufficiently old” was erased from Private Credit Bureaus (in what follows, PCB). Using a Differences-in-Differences (DD) specification, it is found that after old negative information is erased, there is a significant increase in the size and maturity of new loans, no significant changes in interest rates, and an increase in subsequent default rates for the treatment group, relative to the control group. Overall, these results are consistent with both ex-post disciplinary effects, and ex-ante information hold-up from long-lived negative information in PCB. Specifically, consistent with the hold-up theories, the chapter finds that most of the increase in the value of loans comes from outside banks. In addition, consistent with the disciplinary role of information sharing, the chapter finds evidence of a relative increase in the frequency of default for new loans after negative information is erased.

Item Type: Thesis (PhD)
Additional Information: © 2014 Daniel Osorio-Rodriguez
Library of Congress subject classification: H Social Sciences > HB Economic Theory
Sets: Departments > Economics
Supervisor: Sheedy, Kevin
URI: http://etheses.lse.ac.uk/id/eprint/1056

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