Essays on innovation, central bank digital currency and asset pricing

• Main Author: George, Ammu
• Other Authors: Joseph Dennis Alba
• Format: Thesis-Doctor of Philosophy
• Language: English
• Published: Nanyang Technological University 2020
• Subjects: Social sciences::Economic theory::Macroeconomics; Social sciences::Economic theory::Money and banking
• Online Access: https://hdl.handle.net/10356/137122
• Institution: Nanyang Technological University

Globally, economies are preparing for a future where innovations accelerate. Governments are vying to harness new technologies and developing financial innovations to drive progress. Against such a backdrop, this thesis comprises of three independent essays on institutions incorporating innovation and the resulting impact on macroeconomic and financial stability. The first two essays pertains to financial innovation by a central bank who replaces the cash in circulation with a central bank issued digital currency. Several countries like China, France, Sweden etc. have already taken concrete steps or announced their intentions to launch a CBDC in the future (Desouza and Ye, 2019). In this context, the first two essays studies the welfare and macroeconomic implications of the central banks using a financial innovation like CBDC as a secondary monetary policy instrument. The third and final essay deviates from financial innovation to a framework of technological innovation where firms create new patents through Research and Development (R&D). Chapter 1 examines the economic consequences of an interest-bearing design of CBDC, and extend the discussion to an open-economy context with trade and capital flows. Through the lens of a dynamic stochastic general equilibrium (DSGE) model, the study simulate a baseline scenario which resembles a cash economy, and two counter-factual scenarios associated with interest-bearing CBDC — the price rule and the quantity rule regimes. The simulations show that 1) the price rule regime is welfare-improving; 2) the adjustable interest rate on CBDC causes uneven distributional effects between households and financial investors; and 3) macroeconomic stability is enhanced with the adjustable interest rate. Chapter 2 investigates the macroeconomic consequences of implementing an interest-bearing CBDC in the monetary policy framework of an emerging market economy. The model setup in chapter 2 deviates from chapter 1 in terms of; a) households buy both domestic and imported consumption goods using CBDC b) firms use labour alone as the factor of production c) central bank use CBDC interest rate (price rule) to target CPI inflation instead of domestic price inflation d) central bank engages in sterilised foreign exchange (FX) intervention to target exchange rate. The study simulate a baseline cash economy, a cash economy with FX intervention and a CBDC economy with FX intervention. The simulations show that 1) interest-bearing CBDC is welfare improving for an emerging market economy; 2) the adjustable interest rate on CBDC causes uneven distributional effects between households and financial investors; and 3) exchange rate management becomes even more effective when interest-bearing CBDC interacts with sterilised FX intervention. Chapter 3 deviates from the framework of CBDC to a production based asset pricing model where innovation is driven by firms through R&D. Chapter 3 examines the implications of wage inertia on macroeconomic aggregates and asset prices in a production economy where growth is endogenously determined by innovation as developed by Kung and Schmid (2015). Wage inertia such as wage stickiness with endogenous labour supply (Uhlig, 2007; Donadelli and Gruning, 2016) and search and matching models with Nash and with alternative offer bargaining (AOB) (Christiano et al., 2016) are incorporated in the Kung and Schmid (KS) model. Following a positive productivity shock, the AOB model shows a) labour market and asset pricing moments are closer to the data compared to other types of wage inertia models and the benchmark KS model b) the impulse response of dividends is larger – and closer to the data - under AOB compared to the other models since wages rise the least, as labour, vacancies and unemployment are more responsive following a positive productivity shock.