Essays on Incomplete Financial Markets and the Macroeconomy

This dissertation consists of three essays. The first chapter studies a firm’s collateral choice and debt composition in a partial equilibrium setting of the credit market. The model that combines the costly state verification model and collateral constraints suggests that the credit market favors the type of debt that mitigates the credit frictions more efficiently. According to the model, the observed long-term trends in the US credit market can be explained by a steady improvement of uncollateralized lending in mitigating financial frictions. The empirical and narrative evidence supports the arguments. The second chapter compares the two approaches that model uncollateralized lending, the costly state verification and earnings-based borrowing constraints, under the same general equilibrium settings. The similarity in equilibrium conditions and implied dynamics suggest the earnings-based constraint with the excess return specification could be a useful approximation of the costly state verification. The third chapter examines the heterogeneous response of foreign exchange rates to the global temperature shocks under the incomplete market assumption.