A Theory of Financial Intermediaries: Implications for Macroeconomic Activity (Bank Behavior, Money Market Funds).

Abstract

The purpose of this thesis is to develop a model of the financial sector which can be used to examine how monetary policies are transmitted through the macroeconomy. Although in recent years there have been other attempts of this nature, no consensus has emerged. Hence the goal of this thesis is to further the underst and ing of how most appropriately to model the financial sector. A basic model is developed in this thesis and then extended to examine how the addition of a nonbank financial intermediary, a money market fund, alters the way in which monetary policy affects interest rates and the monetary aggregates. It is shown that the inclusion of the fund may lead to more effective or less effective monetary policy, depending on how the fund chooses to hold its assets. In addition four other comparative static experiments are examined and their effect on the endogenous interest rates is discussed. In particular the results obtained in the model without the nonbank intermediary are compared with the results obtained in the model which includes it. Further the thesis examines how the relationship among the interest rates changes when deregulation of the bank deposit interest rate is in effect. Finally, along similar lines, the question of what will happen to money market funds when banks can offer accounts similar to the offered by the fund is discussed. It is shown that as long as the fund can invest in higher return securities and /or as long as there is no reserve requirement placed on money market fund shares, then there will be a role for the fund in the financial sector.