Thesis (Ph. D.)--Massachusetts Institute of Technology, Dept. of Economics, 2010. / Cataloged from PDF version of thesis. / Includes bibliographical references. / This dissertation studies the role of signaling concerns in discouraging access to liquidity facilities like the IMF contingent credit lines (CCL) and the Discount Window (DW). In Chapter 1, I analyze the introduction of IMF CCL in an economy with asymmetric information and financial frictions. Countries have private information about the probability of a being hit by a negative aggregate shock. IMF insurance provides outside liquidity that partially alleviates financial frictions. In the absence of IMF CCL, weak countries face inefficient project termination when the economy is hit by the negative shock, but receive cheaper credit ex ante as they are pooled with strong countries. Once contingent credit lines are introduced, weak countries have to choose between reducing inefficient liquidation and losing the ex ante cross subsidy from pooling. Introducing the CCL leads to a Pareto improvement relative to the no-IMF benchmark only if the IMF can offer a sufficiently large amount of outside liquidity or if it can allow for cross subsidization from strong to weak countries. Chapter 2 studies the role of eligibility requirements that make the CCL close to a rating agency. Risk-averse countries, with private information regarding the probability of being hit by an aggregate income shock, seek insurance in international capital markets. I focus on a No-IMF benchmark in which the target economies for the facility manage to separate from weaker countries by underinsuring. I model IMF CCL as the introduction of an imperfect stress test that countries may voluntarily take. If the stress test is good enough, the IMF generates a Pareto improvement by providing target economies with a cheaper way to separate from weaker economies. However, if the quality of the stress test is low enough, there exists an equilibrium in which no country chooses to take the exam. Provided that the cost of the exam is low enough, I show that forcing all countries to take the exam Pareto dominates the equilibrium in which no country takes the exam. In Chapter 3, I study the role of the DW in the presence of competing liquidity facilities with market determined interest rates. There is stigma attached to borrowing at the DW. Stigma costs are assumed to be fixed costs and therefore banks borrow at the DW only when the fed funds market is severely tight. A more attractive discount window (lower discount rate or lower signaling costs) results in higher total DW borrowing and a higher fraction of banks borrowing from the facility. It is also accessed in more states of the world. I propose an empirical approach based on cross-district data to test for the stigma hypothesis. / by Nicolás Arregui. / Ph.D.
| Identifer | oai:union.ndltd.org:MIT/oai:dspace.mit.edu:1721.1/62396 |
| Date | January 2010 |
| Creators | Arregui, Nicolás |
| Contributors | Guido Lorenzoni, Ricardo Caballero and Francesco Giavazzi., Massachusetts Institute of Technology. Dept. of Economics., Massachusetts Institute of Technology. Dept. of Economics. |
| Publisher | Massachusetts Institute of Technology |
| Source Sets | M.I.T. Theses and Dissertation |
| Language | English |
| Detected Language | English |
| Type | Thesis |
| Format | 112 p., application/pdf |
| Rights | M.I.T. theses are protected by copyright. They may be viewed from this source for any purpose, but reproduction or distribution in any format is prohibited without written permission. See provided URL for inquiries about permission., http://dspace.mit.edu/handle/1721.1/7582 |
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