An examination of the interactions between the real and financial economy
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The primary aim of this thesis is to critically examine the interactions between the real and financial economy, particularly in the context of financialisation, and its implications for the transmission of monetary policy. Understanding this interaction has never been more important, particularly given the nature of the Great Recession. While the foundations that facilitated the Great Recession were financial in nature, the macroeconomic models in use by central banks for policy analysis did not include any role for the financial economy. A number of key deficiencies have therefore emerged: firstly, there is an inadequate integration of the financial economy within macroeconomic models, particularly with regards to the role of money, credit, and asset prices. Secondly, linear macroeconomic models are inadequate to capture the regime changes arising from the dynamic interactions between the real and financial economy. Finally, given these substantive and methodological limitations, the impact of monetary policy under financialisation remains unresolved. This is particularly evident when one examines the existence of the IS puzzle within the US economy. Given these deficiencies, the first objective of this thesis is to assess the empirical properties of the prototypical macroeconomic model used by central banks and policy makers in the run up to the Great Recession. The second objective of this thesis is to examine the nonlinear empirical properties of both macroeconomic and financial variables. Within the context of the IS puzzle in the US, and arising from our analysis, the third objective is to examine the transmission of monetary policy under financialisation. Finally, the fourth objective is to study the nature of the business cycle, the financial cycle, and their interaction using nonparametric methods, with a view to informing the development of alternative macroeconomic theory and policy.
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