Three Essays on Monetary Institutions

This dissertation consists of three essays examining the institutional foundations of financial and monetary stability.

 

Chapter 1 Examines the Suffolk Banking System, a private clearinghouse that operated in New England during the Antebellum period. During this time, New England states maintained lighter state regulations of the banking industry than other US states, creating an environment where private institutions could develop to govern interbank relations. Using geographic regression discontinuity designs along the New York–New England border, I show that the Suffolk System fundamentally reshaped bank incentives, fostering prudent balance sheet management and sharply reducing bank failures. Banks in New England exhibited more conservative balance sheet positions, holding lower loan-to-asset ratios, lower loan-to-liability ratios, and higher cash reserves than comparable banks in New York, while also experiencing substantially lower rates of failure and closure. These findings challenge the conventional view that banking systems with limited government oversight are inherently unstable, demonstrating instead that private market-based institutions can effectively mitigate risk and promote stability.

 

Chapter 2 Evaluates the Reserve Bank of New Zealand Act of 1989, which introduced a series of institutional reforms including the world's first formal inflation target and termination-based accountability for the central bank governor. Employing synthetic control methods on a donor pool of high-income OECD countries, I find evidence that the Act influenced New Zealand's inflation trajectory. Following implementation, inflation declined sharply, diverging from the counterfactual within a year of implementation, with the gap peaking at 8 percentage points. Placebo tests suggest this result is not driven by concurrent fiscal reforms. However, the analysis reveals limited effects on other outcomes: money growth exhibited a contemporaneous decline but fails to meet conventional thresholds of statistical significance, and inflation variability shows no discernible response. The findings provide qualified support for theoretical predictions that rules and enforcement mechanisms can mitigate time-inconsistency problems in monetary policy.

 

Chapter 3 Investigates how monetary policy transmits to investment in innovation through credit-market frictions. Using local projections with high-frequency external instruments on firm-level data from 1991 to 2019, I estimate heterogeneous responses of R\&D expenditure to contractionary monetary policy shocks. Leverage emerges as the strongest predictor of differential responses: high-leverage firms exhibit persistently lower R\&D growth following a tightening, with effects sustained through the five-year horizon examined. Liquidity is the second-most informative margin, while age, size, and dividend status alone are weak predictors. Multi-dimensional analysis reveals that small, highly leveraged firms exhibit the most pronounced responses, and these estimates frequently fall within confidence bands. However, many subgroup estimates are imprecise, and statistical significance varies across horizons. The results are consistent with balance-sheet channel mechanisms whereby monetary tightening erodes internal liquidity buffers and forces reallocation away from long-term investment in innovation.