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Monetary policy and financial stability in a banking economy: transmission mechanism and the capital markets

Barnea, E., 2015, [Groningen]: University of Groningen, SOM research school. 178 p.

Research output: ThesisThesis fully internal (DIV)Academic

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  • Emanuel Barnea
This dissertation comprises four chapters on issues pertaining to monetary policy's transmission mechanism. The first analyzes interactions between monetary policy and financial stability, using a general equilibrium model with financial frictions. It embeds negative externalities for which financial stability policy is needed. The transmission mechanism is shown to depend on financial stability tools. A tradeoff is found in simultaneously accomplishing monetary and financial stability targets. An analysis of the zero lower bound and the unconventional monetary policy is also provided.
Under optimal monetary policy the nominal interest rate should be increased by more than the expected inflation shock to achieve policy targets. This is known as the Taylor principle. The second chapter shows that the Taylor principle need not be satisfied if the monetary authority operates under a regime of commitment. Credible commitment allows a less vigorous optimal policy reaction to supply shocks.
The third chapter constructs a dynamic model with banking capital, where the dynamics are governed by bank's retained earnings and credit risk realizations. It studies the evolution of the profit-maximizing bank's capital ratio and its reactions to shocks during periods of prolonged downturn. The inclusion of financial frictions is enriched by features intrinsic to the banking sector.
The last chapter shows that bonds' yield spreads can be decomposed into a component reflecting the firm's probability of default and a residual referred to as "excess bond premium". The latter is found to be a leading indicator of the real business cycle. The main finding is that this premium reflects influences of banks’ strategies on corporate bond pricing.
Original languageEnglish
QualificationDoctor of Philosophy
Awarding Institution
Supervisors/Advisors
  • Roszbach, Kasper, Supervisor
  • Lensink, Robert, Supervisor
  • Benink, H.A., Assessment committee, External person
  • Demetriades, P., Assessment committee, External person
  • Wessels, Roberto, Assessment committee
Award date21-Dec-2015
Place of Publication[Groningen]
Publisher
Print ISBNs978-90-367-8306-4
Electronic ISBNs978-90-367-8305-7
Publication statusPublished - 2015

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