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Abstract | PDF (172 kilobytes)

The welfare cost of inflation is explored via a search-theoretic model in which along with non-interest-bearing cash, interest-bearing liquid and illiquid assets are available. With inflation, agents are willing to replace higher-return illiquid assets with lower-return liquid assets for consumption purchases. The opportunity cost incurred by this adjustment turns out to have quantitatively significant implications on the cost of inflation. A parameterized version of the model suggests that the cost of 10% inflation with liquid and illiquid interest-bearing assets is almost 3 times larger than that in a cash-only model. This implies that most existing measures of inflation cost with narrow money are substantially underestimated.

Abstract | PDF (261 kilobytes)

We examine interaction among bank credit, trade credit and internal wealth. Our theoretical model derives borrowers' optimal patterns of credit uses depending on internal wealth levels, subject to credit rationing. In particular, the model incorporates signalling effects of and nonlinear interest schedules for trade credit to account for stylized facts from Korean data that are at odds with previous models. Our empirical results are broadly consistent with presence of signalling effects as well as theoretically predicted interaction patterns. The results could be interpreted as a rough estimate of the extent of credit rationing among sample firms.

Abstract | PDF (127 kilobytes)

Kim and Wong (2010) re-examine the robustness of the KMR process (Kandori, Mailath, and Rob 1993) showing that any strict Nash equilibrium for the base game can be selected as a unique long run equilibrium under the KMR process by adding a totally dominated strategy. In response to this negative result, we introduce a state dependent mutational process called the hierarchic process and show that the stochastic long run equilibria of such a process are generically robust with respect to adding or eliminating totally dominated strategies. However the proposed mutational process is not enough to justify eliminating strictly but not necessarily totally dominated strategies.

Abstract | PDF (142 kilobytes)

An optimal aggregation rule of multiple signals is studied. A sufficient condition for the optimality of a linear aggregation rule (the weighted sum of signals) and the common classes of signal distributions satisfying the
condition are provided. Other aggregation rules such as rules using the maximum or the minimum are also considered and their usefulness is illustrated through examples.