Book Description

Abstract: Both economic growth and stabilization require a well-functioning financial system, which includes the central bank and private financial institutions. This dissertation is comprised of three essays on monetary policy and financial development which are related to the roles of the central bank and private financial institutions. To better stabilize the economy, a central bank needs to formulate an optimal strategy for monetary policy and pursues an appropriate objective (targeting regime). In a forward-looking New Keynesian model with persistent output and inflation, the first essay (chapter 2) evaluates a broad hybrid targeting regime when the central bank operates under discretionary monetary policy. By employing the numerical analysis and comparing the performance of different targeting regimes, I find that the hybrid targeting regime yields a social loss closest to that under the optimal committed policy, generating a better outcome than other policy regimes. The second essay (chapter 3) provides new micro-level evidence for the positive relationship between financial development and economic growth based on a large sample of cross-country firm-level data. By examining an important micro channel through which financial development reduces the costs of external finance to firms, I find that firms that are more externally dependent grow faster in countries with more developed financial systems. The third essay (chapter 4) investigates the impact of external debt on long-term investment and its interaction with domestic financial intermediation in emerging markets. Extending the Ramsey-Cass-Koopmans model to a small open economy with the role of financial intermediation, I find that the overall effect of a high level of external debt on investment depends heavily on the degree of domestic financial intermediation. Using a large sample of panel data on 76 developing countries over the last three decades, the empirical results indicate that when a country's domestic banking sector develops to a certain degree, the high level of external debt facilitates investment.