| This dissertation studies the interplay among money, banking, and finance in the macroeconomy. The first chapter examines the implications of banking frictions for the monetary transmission mechanism and the design of the optimal monetary policy. The central assumption is that banks face an agency cost problem when raising loanable funds to finance their lending activities. We show that even with perfect nominal flexibility and full aggregate information, a positive i.i.d. shock to money growth raises employment and output by reducing the financial leverage of banks, and hence the risk premium associated with banks' uninsured liability. Allowing for the serial correlation of money growth shocks, the model's impulse response of the risk premium conforms with the empirical evidence obtained from a structural VAR. We also show that anticipated money growth generates a U-shaped long-run relationship between underemployment and inflation, and a similar long-run relationship between welfare loss and the risk-free nominal interest rate. When banking frictions are severe, the Friedman rule is sub-optimal. The second chapter develops a two-sector general equilibrium monetary model to study the cross-sector comovement phenomenon, a defining characteristic of the business cycle. We show that in a sticky portfolio adjustment model where firms borrow from banks to finance working capital, a positive money supply shock drives the nominal interest rate down, thereby stimulating firms' borrowing and causing employment and investment to rise in all sectors of the economy. A positive aggregate technology shock can also drive the financing cost of working capital down by lowering the external finance premium and induce cross-sector comovement. The third chapter introduces money and credit into a multi-country, multi-sector dynamic general equilibrium model. We show that the positively correlated financing costs of working capital for different countries lead to comovement of credit market activities, and hence the cross-country comovement of output, employment, and investment. Our model differs from the literature in that it is capable of reproducing the cross-country as well as cross-sector comovement within a unified framework. |
