Three essays on monetary economics

The thesis consists of three essays on monetary economics. In particular, I focus on using modern monetary theory with explicit microfoundations to address issues in macroeconomics concerning the effects of inflation and the coexistence of multiple assets. The first essay is motivated by the observation that economies undergoing high inflation often experience a reduction of variety in the marketplace. Existing models study how inflation affects quantity, but few have studied how inflation affects variety. In a monetary model with explicit microfoundations, I analyze how inflation affects variety and quantity. I consider bargaining and price posting with directed search. I show that inflation reduces both quantity and variety under both pricing mechanisms. Quantitatively, the model implies that the total welfare cost of 10% inflation ranges from 4.77% to 8.4% under bargaining and is 1.52% under price posting. In the second essay, I study an economy in which money and credit coexist as means of payment and the settlement of credit requires money. The model extends recent developments in microfounded monetary theory to address the choice of payment methods and the effects of inflation. Whether a buyer uses money or credit depends on the fixed cost of credit and the inflation rate. Based on quantitative analysis, the model suggests that the relationship between inflation and credit exhibits an inverse U-shape which is broadly consistent with the evidence. Compared to an economy without credit, allowing credit as a means of payment affects the economy's money demand, welfare and the welfare cost of inflation. In modern monetary theory, money is viewed as a substitute for the record-keeping technology. In the third essay, my coauthor and I investigate whether one money constitutes a perfect substitute for the record-keeping technology in a quasi-linear environment, where private information and limited commitment are present. We adopt the mechanism design approach and solve a planner's problem subject to various constraints. The result is that when money is divisible, concealable and in variable supply, one money may not be sufficient to replace the record-keeping technology. We further show that two monies are a perfect substitute for the record-keeping technology.