This paper examines empirical evidence of the adaptive learning behavior of speculators in the 2005–2008 renminbi appreciation episode, and establishes a theoretical model to explore appreciation policy implications of such a behavior. In our model, speculators form their expectations about...

This paper studies contagion and market freezes caused by uncertainty in financial network structures and provides theoretical guidance for central banks. We establish a formal model to demonstrate that, in a financial system where financial institutions are interconnected, a negative shock to...

This paper examines the optimal appreciation path of an under-valued currency in the presence of speculative capital inflows that are endogenously affected by the appreciation path. A central bank decides the optimal appreciation path based on three factors: (i) Misalignment costs associated...

This paper examines the optimal appreciation path of an undervalued currency in the presence of speculative capital inflows that are endogenously affected by the appreciation path. A central bank decides its appreciation policy based on three costs: (i) misalignment costs associated with the gap...

This paper studies contagion and market freezes caused by uncertainty in financial network structures and provides theoretical guidance for central banks. We establish a formal model to demonstrate that, in a financial system where financial institutions are interconnected, a negative shock to...

The transmission of monetary policy is studied in an environment in which aggregate liquidity shocks affect agents asymmetrically. Agents are subject to random liquidity requirements and interact with banks which both take deposits and make loans. Banks may issue loans in excess of their...

We build a general equilibrium model to analyze how the ability of banks to create money can affect asset prices and financial stability. In the model, demand for liquidity takes the form of demand for money to make payments. We show that banks can provide elastic aggregate liquidity by creating...

We examine the convertible bonds whose conversion prices can be reset under certain conditions, by extending the asymmetric information framework of Stein (1992). These convertibles are more common in Japan and China and are in sharp contrast with the convertible bonds with fixed conversion...

Optimal monetary policy is studied in an environment in which money plays an essential role in facilitating exchange and aggregate shocks affect individual agents asymmetrically. Exchange may be conducted using either bank deposits (inside money) or fiat currency (outside money). A central...