Three Essays on Monetary Policy Transmission and Banking Crises

This dissertation aims to increase understanding of financial fragility and to support good responses by monetary policymakers. It is composed of three essays. Chapter 2 studies how the supply of bank loans affected balance sheets and bankruptcies of businesses under various regulatory structures in the early twentieth century. I find that a contraction in the supply of bank loans deteriorated businesses' balance sheets. As a result, courts saw more bankruptcies among businesses with high exposure to bank debt. Tight bank credit also reduced trade credit extended among businesses. I also show that the Glass-Steagall Act mitigated the impact of bank loans on businesses. Chapter 3, co-authored with Alan G. Isaac, develops a network model of financial contagion and demonstrates with agent-based simulations that the interactions between banks and firms can generate and propagate financial fragility and business cycles. We also show that timely monetary policy intervention has effects on both financial and economic stabilization. Active use of discount window proves a useful response to idiosyncratic shocks, but intervention in the repo market is more powerful against cyclical fluctuations.Chapter 4 uses an event study approach to examine how Fed's credit easing policy in the recent crisis affected different sectors. I show that, early on, emergency lending programs only benefited financial firms, while quantitative easing improved the fundamentals of all firms,although the financial sector still benefited more than other sectors.