Essays in financial intermediation, monetary policy, and macroeconomic activity

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Dressler, Scott James

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This dissertation stresses the importance of financial intermediation and monetary policy in explaining macroeconomic observations. The chapters extend lines of existing literature by considering modelling environments which include previously unconsidered features such as endogenous inside-money holdings, endogenous monetary policy, and potential asymmetric responses.Chapter 1 observes that a 1979 change in US monetary policy coincided with a break in the cyclical behavior of monetary aggregates. A model is developed to determine the quantitative importance of a change in monetary policy in accounting for these observations. The model is taken to the data using a variety of methods, and shows how systematic monetary policy could play an important role in explaining this observation. The model also captures Granger-causality from money to output, without an avenue for money to actually cause output. Chapter 2 examines the response in the lending activity of commercial banks to changes in monetary policy by allowing lending activity to respond independently over periods of monetary contraction and expansion. This exercise tests the implicit assumption made in the lending channel literature that the change in lending activity after a monetary contraction is equal

in absolute value to the change after an expansion. The results show strong support for asymmetry but not in the way a simple extension of the lending channel theory would predict. Chapter 3 seeks to determine the quantitative importance of the financial collapse and the large drop in broad monetary aggregates in explaining features of the Great Depression. A financial collapse in the model is interpreted to be an exogenous preference shock towards valuing cash goods relative to deposit goods and the model is simulated by inputting estimates of the shock series which match the deposit-currency ratio of the episode. The model successfully matches the severity and persistence of the output drop during Great Depression and does equally well on other dimensions. These results suggest that the shift away from households holding inside money is an important feature of the episode.