Three Essays on Money and Monetary Policy
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Browne, Frank, Three Essays on Money and Monetary Policy, Trinity College Dublin.School of Social Sciences & Philosophy, 2021Download Item:
Abstract:
This thesis deals with money and monetary policy in the context of the US economy. My focus is on the rapidly evolving financial market landscape in the US. This has been instigated by financial market liberalisation, which has impinged on money and monetary policy in interesting but worrying ways. The cause for worry stems from hidden inter-connections between micro-orientated prudential regulatory policy and macro-oriented monetary policy measures. These could conceal effects that would, for example, complicate the formulation and operation of monetary policy and lead the central bank into policy errors. A key conclusion from my empirical work is that there has been a regime shift stemming from this financial market liberalisation. My best estimate suggests that it occurred in the late 1980s. My empirical work supports my theory that the changed financial market environment should see the effect of uncertainty on money and the short-term rate of interest switch sign as the US economy made the transition from the old pre-regime shift to the new post regime shift and as the store-of-value motivation for holding money started to outweigh the medium-of-exchange motivation for holding money on foot of financial liberalisation. I use a variety of empirical methodologies to support my theoretical reasoning. I uncovered a new anti-cyclical pattern of money growth in the post-late 1980s regime for the US economy, the mirror image of the iconic Friedman/Schwartz pro-cyclical money growth pattern. This is consistent with my theoretical expectation. In addition, simple bilateral correlations between money growth and an array of what I denote as partial/sectoral uncertainty proxy variables provide robust corroboration for my overall narrative. Econometric estimation also provides support for the theory being propounded in the dissertation. Money demand estimation revealed little difficulty in pinning down a stable cointegrating relationship for the pre-late 1980s regime but revealed considerable difficulty in doing so for the post-late 1980s regime, again lending support for the theory being propounded. I examine the Taylor rule in the novel context brought about by financial market liberalisation, i.e., one in which the central bank is losing monetary policy leverage. In this new environment, negative and positive shocks will see the money market and the central bank seeking to drive the short-term money market rate of interest in opposite directions. I argue, supported by the data, that the accompanying loss of leverage is the main driving force behind Taylors Great Deviation and not bad monetary policy as Taylor alleges. The thesis also offers a new theory with respect to how monetary policy is transmitted to the economy. The novel part of the theory is that monetary policy decisions are transmitted to the economy via two distinct types of agents, namely those that are, and those that are not, liquidity constrained. Within this context, a formal model of price level determination is derived. It obtains solid support from the data for the US economy. Crucially, it also supports the existence of a quantitative monetary channel of transmission running simultaneously alongside a price, i.e., interest rate, channel.
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Author: Browne, Frank
Advisor:
Scanlon, PaulPublisher:
Trinity College Dublin. School of Social Sciences & Philosophy. Discipline of EconomicsType of material:
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