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    Essays on the financial system and the transmission of monetary policy

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    Qiu_Junfeng_200707_Phd.pdf (1.447Mb)
    Date
    2007-07-11
    Author
    Qiu, Junfeng
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    Abstract
    This thesis studies the role of the banking system in several aspects of the macroeconomy, including the likelihood of financial

    crises, volatility of asset prices and the transmission of monetary policy.

    In chapter 2, I analyze the accumulation of international reserves by central banks as insurance against financial crises. In the

    model, private banks borrow from foreign creditors to invest in domestic projects. By lending to banks in response to liquidity

    shocks, the central bank can reduce the liquidation of bank assets and lower the probability of bank runs. I show that the

    central bank will hold more reserves when private banks hold lower reserves. I also find that if the central bank can borrow

    additional loans from external sources, then domestic banks will hold fewer reserves by themselves. If the borrowing cost of

    external loan is very high, then the central bank may actually want to accumulate more reserves in order to avoid borrowing from

    external sources at high costs.

    In chapter 3, I show that the ability of banks to supply liquidity through money creation is important for financial stability.

    By supplying liquidity, banks can smooth the sale of assets and stabilize asset prices. I find that without elastic money, the

    attempt of non-bank mutual funds to raise cash by selling assets will only add more volatility into the market. Elastic money

    provided by banks can help mutual funds better smooth the consumption of their shareholders.

    In chapter 4, we consider the role of elastic money in an different environment where liquidity shocks affect agents

    asymmetrically. We show how money growth and interest rate policy can be used to adjust the consumption level of households. We

    find that the optimal policy is affected by the sensitivity of the supply price to the interest rate. When the supply price is

    more sensitive to the interest rate, it would be better to adopt a higher inflation rate, and to make the zero-bound of nominal

    interest rate less likely to be binding.
    URI for this record
    http://hdl.handle.net/1974/440
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    • Queen's Graduate Theses and Dissertations
    • Department of Economics Graduate Theses
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