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This is a collection of four papers, which study a range of topics related to money and finance and use different modeling techniques. The topics, nonetheless, are closely related to a main financial friction: default. The essay on default and monetary policy establishes "collateral default" as an additional monetary transmission mechanism. It studies the interactions between monetary policy, collateral prices and default decision. It shows hat default leads to suboptimal out come by causing inefficient allocations of capital goods. The essay on default and borrowing constraint studies the optimal Loan- to-Value ratio. It shows that the welfare of constrained borrower is not monotonically increasing in the LTV ratios . Moreover, there exist an over borrowing issue which necessitates government regulation on the amount of borrowing. The essay on default and banking regulation provides a DSGE model to study the impacts of Basel capital requirements on the real economy. It predicts banks' choice for the different regimes under the Basel framework. Finally, the essay on default and financial infrastructure studies the capital requirements on the over-the-counter derivative central counterparties (CCPs). It finds that the capital buffers of CCPs are highly sensitive to alternative model assumptions and inputs. Thus, it calls for detailed and prescriptive regulatory standards to avoid regulatory arbitrage land to sustain financial stability.

This thesis consists of three papers that analyse the conduct of monetary policy in emerging markets, highlighting firstly the implications of government liability dollarisation and secondly the existence of excess liquidity in the commercial banking system. In the first two papers, the impact of foreign currency government debt on the welfare implications of alternative monetary policy rules is analysed using a small open-economy general equilibrium model. In a version of this model calibrated to represent a typical emerging market economy we find that even in the presence of significant liability dollarisation, CPI inflation targeting welfare dominates an exchange rate peg.

This thesis examines issues of ifinancial intermediation in Uganda and Nigeria, banking stability across OECD countries and the monetary transmission mechanism in Thailand. A panel model is constructed to investigate the determinants of Ugandan bank interest rate margins and spreads especially which bank-specific, banking industry-specific and macroeconomic factors are responsible for the persistently high margins-and spreads in Uganda in the past years. Overall our findings point towards the strong role of bank-specific characteristics and structural impediments in explaining margins and spreads. We do not find a robust and economically significant relationship between privatization. foreign bank entry, market structure and banking efficiency.

Overview: This thesis studies the coordination of individuals' transactions in a large, decentralized market. The first half of the thesis examines the role of market institutions in an environment with frictions. In particular, it studies the interaction between "intermediaries" (banks, shops) and decentralized "equilibrium arrangements" such as money or credit. The second half of the thesis studies the role of public and private information in coordinating individual actions, as well as the macro-economic effects of such coordination. First Half: I study a search economy in which intermediaries are the driving force co-ordinating the economy on the use of a unique, common medium of exchange for transactions. If search frictions delay trade, intermediaries offering immediate exchange opportunities can make arbitrage gains from a price spread, but they have to solve the search market's allocation problem. Intermediaries solve this problem best by imposing a common medium of exchange to other agents, and a Cash-in-Advance constraint arises in equilibrium: Agents trade twice in order to consume, once to exchange their production against the medium of exchange, and once to purchase their consumption. I extend my analysis to the study of fiat currencies and, in particular, free banking regimes. Second Half: The second half consists of two essays studying the role of public and private information in coordination games. In the first, I relate the convergence of equilibria to the convergence of higher-order beliefs. The central result of this essay relates the convergence of players' higher-order beliefs (and hence equilibrium convergence) to the parameters of the signal structure. This provides a limit condition determining the uniqueness or multiplicity of equilibria in the coordination game. Building on the previous chapter, the second essay studies the effects of information policies on output and inflation, when price-setters face higher-order uncertainty concerning the money supply. I show that this may lead to substantial delays in price-adjustment following a shock. To the extent that public announcements coordinate expectations, they reduce this delay, and thereby reduce the effect and persistence of monetary shocks on output in the short-rim. On the other hand, public announcements introduce a second component of noise, and may therefore increase short-run volatility.

This thesis studies the interactions between financial markets, monetary policy, and the real economy. It analyses the role of financial markets in business cycle fluctuations and explores issues concerning systemic financial stability. Chapter One develops a dynamic general equilibrium model in which firms and banks face financial frictions in obtaining external funds. The model exhibits an unconventional bank capital channel as monetary policy affects the economy partly via its effect on bank capital. We show that the dynamic interactions between bank capital, firm net worth and asset price amplify and propagate the effect of a monetary shock in the macroeconomy. Chapter Two empirically investigates the importance of financial markets in the monetary transmission. The analysis is based on the argument that the real money stock serves as a proxy for the relative yields of various non-money assets that matter for aggregate demand. Using Thailand data, we find that the two-asset assumption is biased and that this problem can be ameliorated by introducing an explicit role for money into standard macroeconomic models. Chapter Three develops a numerically-solvable version of our general model [Goodhart, Suni-rand, and Tsomocos (2003)] to analyse financial fragility. The model incorporates heterogeneous agents and therefore leads to different simulation results from those obtained when using standard representative agent models; the effect of a shock depends on the part of the economy on which it falls and can generally shift the distribution of income and welfare between agents. Chapter Four proposes a general equilibrium model incorporating three heterogeneous banks. This allows us to study not only the interactions between any two individual banks, but also their inter-relationship with the rest of the banking sector. The model is calibrated against real UK banking data and therefore can be implemented as a risk assessment tool for financial regulators and central banks.

These essays look at determinants of inflation and policies to control it at different stages of transition. It attempts to determine what factors have shaped the inflationary process, how successful were the policies adopted to control inflation, and what policy conclusions can be drawn from the experience of transitional economies. The first paper analyzes central bank independence in transitional economies, regarded as key for a successful monetary policy making. The results show that the central bank independence started to influence inflation only after the initial transitional shocks. The next two papers analyze monetary transmission mechanisms in less advanced economies, choosing Georgia and Romania as examples. The papers estimate structural models of inflation. The results show that, in the case of Romania, inflation was driven by a monetary expansion. Interactions between real and monetary developments were limited when inflation was high. In Georgia, where the dichotomy between the real and monetary sectors is also evident in the data, the tight control over the exchange rate was crucial for maintaining a low-inflation equilibrium. The third paper focuses on inflation in advanced transitional economies, analyzing transmission mechanisms and assessing the implementation of inflation targeting in the Czech Republic and Poland. The results show that the exchange rate has played a significant role in the transmission mechanism, suggesting that the behavior of this variable should be carefully watched even under an inflation targeting regime. The last paper in the thesis analyzes the credibility of inflation targets, which is the main factor affecting the costs of disinflation under the inflation targeting framework. The paper attempts to identify to what extent inflationary expectations in Poland were guided by announcements of the targets. The results show that the credibility of the targets increased after the introduction of inflation targeting, but dropped quickly after the target was missed.