Date of Award

8-12-2014

Degree Type

Dissertation

Degree Name

Doctor of Philosophy (PhD)

Department

Economics

First Advisor

Andrew Feltenstein

Second Advisor

Charles Hankla

Third Advisor

Felix Rioja

Fourth Advisor

Pedro de Araujo

Fifth Advisor

Shiferaw Gurmu

Abstract

This dissertation states that the behavior of banks and investors varies according to the rules of the game and demonstrates that the level of institutional development may have an important role on the effectiveness of monetary policies. The level of institutional development is measured by the quality of contract enforcement, the level of corruption, the extent of political stability, the level of government's transparency and accountability and the quality of the implemented policies and regulations. This research presents a framework to explain how the traditional channels of monetary policy transmission are altered by the level of institutional development, allowing the construction of three hypotheses. The first hypothesis is that institutional development matters for the effects of monetary policies on output. The second hypothesis is that contractionary policies have more adverse effects on output in countries with low institutional development than in countries with high institutional development. The third hypothesis is that expansionary policies are more effective in terms of output promotion in countries with high institutional development than in countries with low institutional development. To the best of our knowledge, this is the first time that research has established a relationship between the level of institutional development and the asymmetric effects of monetary policies on output. Two country examples are presented: the case of Nigeria illustrates the third hypothesis and the case of Brazil illustrates the second hypothesis. Several econometric models and six institutional development indicators are used to evaluate the three hypotheses. This dissertation provides strong empirical support for the hypotheses 1 and 2, sustaining the argument that the asymmetric effects of monetary policies on output may have deep institutional causes. Rule of law and government effectiveness are the indicators that matter most for the effectiveness of monetary policies. Particular consideration should be given to the rule of law indicator because of its clear connection with the theoretical arguments and country examples, suggesting that fundamental institutional improvements should be focused on the efficiency of the judiciary system and the quality of law enforcement.

DOI

https://doi.org/10.57709/5774956

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