The Monetary Transmission Mechanism: Quanitative Theory and Policy Implications

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The purpose of this project is to develop empirically based, general equilibrium models of the monetary transmission mechanism, and use them to evaluate the desirability of alternative monetary policies. The research consists of five parts. The first develops a monetary model of the aggregate economy and proposes to investigate its implications for the proper conduct of monetary policy. In the second part, the model will be estimated with a broad set of financial data. The third part involves building a richer intermediate financial sector based on findings from parts one and two. The fourth part of the research well entail the investigation of the small sample properties of the statistical tools that will be used for model evaluation. The final part of the study will investigate the potential for seasonal demand shocks to the economy to help account for features of the business cycle. The conventional view is that seasonal shocks are irrelevant, and thus it is appropriate to use seasonally adjusted data for model estimation. This project is important because it will provide a better understanding of the interrelationships between monetary policy and the business cycle.