| This dissertation consists of three essays on the interactions between monetary policy and financial development. Chapter one examines the interactions between the development of financial markets and monetary policy through the effects of the stock market. In particular, I demonstrate that the effects of monetary policy depend on the provision of financial services. For instance, the effects of monetary policy are more pronounced in the presence of a stock market. Furthermore, by studying local dynamics, I show that financial markets and monetary policy can have a significant impact on volatility in the economy. Interestingly, this provides additional scope for monetary policy to stabilize the economy.;In my second essay, I explore the linkages between monetary policy and the financial sector by studying the role of asset prices. Interestingly, I demonstrate that the effects of monetary policy depend on the interaction between asset prices and the price of new equipment. As a result, I show that the optimal monetary growth rate may exceed the Friedman Rule. However, I find that monetary policy should not react to asset prices if the value of the stock market has a significant impact on the price of new equipment. In contrast, if the impact of equity prices on the cost of capital is not too pronounced, the central bank should pursue a tight monetary policy in response to a surge in equity returns. In particular, monetary policy should react more aggressively if the surge in returns is due to investment-specific technological change.;In my final chapter, I study the interaction between developments in the payments system and monetary policy. Notably, I demonstrate that the effects of monetary policy depend on conditions in the payments system. In particular, inflation exacerbates information frictions in economies with poorly developed financial systems. In turn, it impedes financial development and capital formation. In contrast, developed economies also have more advanced financial markets. This allows resources to be channeled towards more productive investment opportunities. Moreover, a deeper payments system improves liquidity management and reduces the cost of liquidity risk. Consequently, higher inflation promotes capital formation in more developed countries.;Keywords. Monetary Policy, Economic Development, Financial Development, Asset Prices, Inflation Thresholds. |
