Essays on monetary policy and banking

This dissertation consists of three essays, which investigate the monetary transmission mechanism, and especially the role of banks, in linking changes in monetary policy to changes in the aggregate economy. It considers the importance of banks in the monetary transmission in both a closed and a small open economy. In the first essay, entitled “The Effect of Monetary Policy on Bank Lending and Aggregate Output: Asymmetries from Nonlinearities in the Lending Channel,” I use aggregate banking data and adopt a nonlinear vector autoregressive approach to investigate whether bank lending behavior can provide a convincing explanation for asymmetries in the impacts of monetary policy on output. In the second essay, entitled “Monetary Policy Asymmetry and Bank Portfolio Composition,” I use micro banking data and employ alternative methodologies to examine the hypothesis that the effect of contractionary and expansionary policy transmitted through individual bank actions will differ predictably depending on bank portfolio composition (either bank asset size or bank capitalization, or both). In the third essay, entitled “The Credit Channel of Monetary Transmission in a Small Open Economy,” I develop a theoretical model for a small open economy in order to analyze bank lending behavior. I find that bank lending behavior may amplify, neutralize or attenuate the effects of monetary policy on output under alternative monetary transmission mechanisms. Empirically, I adopt a vector autoregressive approach and use quarterly data for Canada to evaluate the prediction of the model.