Author

Haibo Yao

Advisor

Roskelley, Kenneth

Committee Member

Cline, Brandon N.

Committee Member

Rogers, Kevin E.

Committee Member

Highfield, Michael J.

Committee Member

Campbell, Randall C.

Date of Degree

1-1-2014

Original embargo terms

MSU Only Indefinitely

Document Type

Dissertation - Open Access

Abstract

My research makes three contributions to the literature. The first contribution is to find supportive evidence for the augmented Taylor rule model with orthogonalized bond market variables I build to more accurately describe and forecast the behavior the Federal Reserve, with improved model’s fit both in and out-of-sample. The second contribution to the existing literature is that I find supportive evidence for a macro explanation of industrial firm behavior in the United States. The third contribution of this paper is that I provide a new aspect to understand the monetary policy and the monetary policy transmission mechanism for both monetary policy practitioners and researchers. This research proceeds as the following: Essay one provides a literature review for the research in this dissertation discussing background and theories for both the empirical and theoretical applications of the Taylor rule, a tool for the setting of the federal funds rate. The second essay is designed to understand the setting of monetary policy by the Federal Reserve. I show that augment a simple Taylor rule with bond market information can significantly improve the model’s fit, both in and out-of-sample. The improvement is enough to produce lower forecast errors than those of non-linear policy models. In addition, the inclusion of these bond market variables resolves the parameter instability of the Taylor rule documented in the literature, and implies that the lagged federal funds rate plays a much smaller role than that suggested in the previous studies. The third essay examines the impact of monetary shocks on corporate cash holdings. I find evidence that small industrial firms hold onto cash when monetary policy is too tight and large industrial firms do the reverse both in the short-run and in the long-run. Further tests examine whether the long lasting loose monetary policy results in the pileup of corporate cash holdings. The evidence supports the assumption that industrial firms take the “long lasting lower interest rate” environment to hoard cash to buffer the monetary policy effectiveness.

URI

https://hdl.handle.net/11668/18378

Available for download on Wednesday, August 15, 2114

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