Three Essays in Monetary Economics and Banking

Abstract

Banks play a major role in all the economic and financial activities in modern society. In this dissertation, I explore three separate, yet closely hinged topics in banking. In the first chapter, I investigate how banks respond to monetary policy changes and translate them into real-economy consequences. Utilizes the adjustment of reserve requirements due to the phase-in program of the 1980 Monetary Control Act and annual updates of reserve regulations as a natural experiment, I find that the reduction in the reserve requirement increases new loans extended by banks. Moreover, the reduction in required reserve leads to employment growth at the county level. In the second chapter, I look into the nexus between bank networks and international trade. Using a novel dataset of the domestic and overseas expansions of Chinese banks and firm-level microdata, I find that bank networks promote trade by providing financial services that reduce general trade cost and information asymmetry. In the third chapter, I study the political economy of government-owned banks and reveal the micro-mechanism behind the low-efficiency of state-owned banks. I find that these banks are often encouraged to enter less profitable but politically needed locations that could help government officials to enhance their career prospects. This type of expansion pattern reduces financial prudence and increases risk. Also, using export decline during the Great Recession as an exogenous shock, I find that more geographically concentrated banks were more likely to perform poorly during the crisis, which implies that political intervention increases the financial risk.