Essays in banking and monetary policy

In the first chapter, I demonstrate that banks play a special role in the transmission mechanism of monetary policy, and that this role potentialy explains the excessive sensitivity and asymmetric response of the real economy to small and temporary changes in interest rates. While banks exploit imperfectly-priced deposit insurance in order to ameliorate the underinvestment problem created by financial constraints, open-market operations by the central bank control the aggregate supply of insured deposits, and thus the severity of these constraints. I demonstrate in the second chapter that tougher bank capital requirements did not affect on the banking industry in the 1980s. Banks with relatively low capital raised their capital ratios relative to better capitalized banks well before any tightening of standards, and did not change their behavior following the change in policy. This implies that banks have market-based incentives to hold capital, an important consideration in designing bank regulation. In the third chapter I illustrate that there is very little correlation between how monetary policy affects state output and how the shocks which monetary policy is trying to smooth affect state output. This correlation is weak enough to imply that while monetary policy may have reduced the variance of aggregate output growth over the last 30 years, it has actually increased volatility for a majority of states. This result has important implications in choosing appropriate target variables for the central bank.

Department dc:contributor.department

Massachusetts Institute of Technology. Dept. of Economics.

Grantor dc:publisher

Massachusetts Institute of Technology

Year dc:date.issued

2001

Author dc:creator

• Ashcraft, Adam Blair, 1974-

Advisor dc:contributor.advisor

• Daron Acemoglu and Olivier Blanchard.

• Economics.

Statement dc:rights

• M.I.T. theses are protected by copyright. They may be viewed from this source for any purpose, but reproduction or distribution in any format is prohibited without written permission. See provided URL for inquiries about permission.

Licence dc:rights.uri

• http://dspace.mit.edu/handle/1721.1/7582

Language dc:language.iso

eng

Handle dc:identifier.uri

http://hdl.handle.net/1721.1/8657

OAI identifier oai:identifier

oai:dspace.mit.edu:1721.1/8657