Thesis (Ph.D.) - Indiana University, Economics, 2017My thesis studies the effect of financial frictions on the monetary policy transmission mechanism in four chapters. The first chapter, Credit Constraints in a New Keynesian Framework: A Simple Theoretical Analysis, studies how financial frictions alter equilibrium outcomes. I show that collateral borrowing constraints have general equilibrium effects that operate via four channels; borrowers' collateral value, savers' portfolio reallocation, wage adjustments, and wealth effects due to changes in firms' profits. In the second chapter, Monetary Policy and Credit Constraints, I present an extension of the model in the first chapter and calibrate the baseline version of this model to the U.S. economy. I show that a monetary expansion leads to a smaller increase in aggregate output in the New Keynesian model where the collateral borrowing constraints are included relative to the standard model without constraints. As the fraction of credit constrained agents becomes larger, the increase in aggregate output becomes smaller. In the third chapter, An Empirical Assessment of the Transmission of Monetary Policy, I conduct a study of the transmission of monetary policy via three credit costs components; riskfree rate (conventional channel), spread over the risk-free rate (credit spread channel), and nonspread factors such as credit limits (non-spread credit channel). I find that financial frictions are relevant for monetary policy transmission; the credit channel accounts for about 20% - 30% of the change in consumption expenditures. Additionally, non-spread factors play a non-trivial role. In the final chapter, Monetary Policy Revisited: Heterogeneous Bank Pass-Through of Credit Expansions, I relax the assumption that the central bank directly impacts vi borrowing/lending rates by explicitly modeling the pass-through from banks to households. In my model, banks offer differentiated credit contracts to households as a consequence of financial frictions. Following monetary expansions, the relaxation of credit conditions is about three times larger for households at the top of the wealth/income distribution relative to those at the bottom. Incorporating this heterogeneous pass-through mechanism reduces the response of aggregate consumption to a monetary expansion by about five times.