Chapter 1 examines the qualitative and quantitative impacts of collateral quality imperfection on business cycles. When it is costly to investigate collateral quality, the credit cycles freature a regime switching effect, depending on whether it is profitable to incur information investigation. The occurrence of the regime switches in credit markets generates asymmetric responses to collateral quality shocks, which in turn amplifies the business cycles, contributes additional volatility as well as generates interest rate spikes. By calibrating the model using US data, I find that even small fluctuations in collateral quality can well explain the stylized patterns of real business cycles, especially with regard to housing prices and rents. Moreover, the results indicates that the...[ Read more ]

Chapter 1 examines the qualitative and quantitative impacts of collateral quality imperfection on business cycles. When it is costly to investigate collateral quality, the credit cycles freature a regime switching effect, depending on whether it is profitable to incur information investigation. The occurrence of the regime switches in credit markets generates asymmetric responses to collateral quality shocks, which in turn amplifies the business cycles, contributes additional volatility as well as generates interest rate spikes. By calibrating the model using US data, I find that even small fluctuations in collateral quality can well explain the stylized patterns of real business cycles, especially with regard to housing prices and rents. Moreover, the results indicates that the collateral quality is of particular relevance to the 2007 - 2009 financial crisis.

Chapter 2 provides a theory of credit-driven asset bubbles in an infinite-horizon production economy. Entrepreneurs face idiosyncratic investment distortions and credit constraints. An instrinscially useless asset such as land serve as collateral for borrowing. A land bubble can form because land commands a liquidity premium. The land bubble can provide liquidity and relax credit constraints, but can also generate inefficient overinvestment. Its net effect is to reduce welfare. Property taxes, Tobin's taxes, macroprudential policy, and credit policy can prevent the formation of a land bubble.

Chapter 3 studies the impact of capital flows on the asset bubbles in a small open emerging market economy. Capital flows can affect the existence of asset bubbles and real exchange rate. When the world interest rate rises, economies with bubbles are more adversely affected than economies which are without bubbles but otherwise the same. Strong capital control can mitigate the adverse impact on economies with bubbles.