Abstract:
This dissertation studies monetary policy during the financial crisis. Particularly, the three essays investigate the transmission channel and effect Discount Window (DW) and Term Auction Facility (TAF) as well as the optimal policy conduct during crisis period. In the first essay, we examine the transmission channels of the Federal Reserve's maturity extension policy on DW and TAF activity during the crisis period. Specifically, we separate the maturities and the size of loans to differentiate the effects of overnight fund availability from maturity extension. Our findings indicate that maturity extension of DW loans promoted long-term (LT) lending by small banks in the banking sector, but this was generally limited to the time before the failure of Lehman Brothers. Finally, maturity extension of the TAF promoted residential real estate (RRE) lending by medium and large banks. In the second chapter, we seek to examine the impact of mortgage recourse provisions on the effectiveness of the Federal Reserve's maturity extension policy during the crisis. Our results indicate that banks that were operating in non-recourse states did have a higher probability to borrow from the DW in comparison to their peers in recourse states. Moreover, small-sized banks in non-recourse states tended to borrow for longer maturities, especially after the bankruptcy of Lehman Brothers. Furthermore, the effect of maturity extension at the Federal Reserve's Term lending programs was weaker among non-recourse banks. In the last chapter, we develop a general equilibrium framework in which banks perform two important functions in the financial system – risk pooling and lending services. In doing so, the paper thoroughly investigates how the effects of monetary policy depend on the distribution of liquidity risk and demand for loans in the economy. When the rate of money growth is sufficiently high, monetary policy is superneutral in parts of the economy but non-superneutral to the rest. Finally, if there is more liquidity risk in parts of the economy, it is optimal to adopt a lower rate of money growth. However, if such an increase happens in the lower liquidity risk region, the optimal policy is the opposite.
