Date of Award


Degree Name

Doctor of Philosophy



First Advisor

Dr. C. James Hueng

Second Advisor

Dr. Sisay Asefa

Third Advisor

Dr. J. Kevin Corder


The global financial crisis triggered by fallout from the sub-prime mortgage market in the U.S. has led economists to focus attention on the role of monetary policy in the crisis. The question of how monetary policy affects the financial sector is the key to the current debate over the role financial stability should play in the monetary policy decisions. As a contribution to this debate, my dissertation examines the link between monetary policy and three main financial sectors - the banking sector, the stock market, and the housing market.

The first essay examines whether the Federal Open Market Committee (FOMC) responded to changes in equity prices during the period 1966-2009. I distinguish the indirect response, where the FOMC reacts to equity prices only when equity prices affect its target variables, from the direct response, where the FOMC reacts to equity prices directly regardless of their effects on the target variables. In addition, the paper models the Federal Reserve's reaction function as state dependent, hypothesizing that the FOMC may respond to changes in asset prices asymmetrically during different states of the economy. The results show that the FOMC did respond directly to equity price changes when asset prices were falling. During non-bust periods, the FOMC did not respond directly to equity prices. It used information on equity prices to forecast target variables.

The second essay investigates the effect of expansionary and contractionary monetary policy on the risk taking behavior of low-capital and high-capital banks. Using quarterly data on federally insured banks spanning the period from 1991 to 2010, the paper shows that expansionary policy caused high capital banks to take more risk. Capital constrained banks were not significantly affected by expansionary monetary policy. Contractionary monetary policy, however, is not effective in affecting the risktaking behavior of both capital-constrained and unconstrained banks. The paper, therefore, confirms the hypothesis that expansionary policy is more effective in encouraging capital unconstrained banks to invest more in risky assets.

The third essay examines the role of monetary policy on housing bubbles in the last three decades. A spatial dynamic model is used to explicitly account for spatial cross-section dependence in the data. Using quarterly panel data on 48 contiguous U.S. states and District of Columbia, the paper discovers that the housing bubbles across the U.S. are mainly driven by the local or state specific factors during the period 1976 - 2000. However, the prolonged low interest rate since the 2001 recession contributed to the run-up in house prices across states.

Access Setting

Dissertation-Open Access