Theoretical perspectives and empirical evidence support a link between narrative identity and psychological functioning. When examining this relationship, psychological functioning has typically been conceptualised in terms of diagnostic symptoms. As a result, the transdiagnostic psychological processes underpinning the relationship remain largely unexplored. Additionally, recent research proposes that the relationship between narrative identity and psychological functioning may be reciprocal, but research has primarily utilised cross-sectional data or considered characteristics of narrative identity as predisposing factors. The work in this thesis addresses these gaps in the field by examining potential underlying psychological processes and exploring potential reciprocal associations in a sample of young adults. In the first study, a systematic review was conducted to identify transdiagnostic factors either associated with narrative identity or that mediated or moderated its relationship with psychological functioning. The review comprised 11 studies and revealed mixed findings for the support of rumination, overgeneral memory (OGM), emotion dysregulation, and attachment state of mind as transdiagnostic factors that may be uniquely associated with narrative identity or mediate or moderate the relationship between narrative identity and psychological functioning. In the second study, 245 university students were recruited to investigate the mediating and moderating effects of the identified transdiagnostic factors. Findings revealed that rumination and emotion dysregulation, but not OGM, mediated the relationship between lower causal coherence and psychological functioning. Surprisingly, neither attachment state of mind nor memory tone moderated any relationships between narrative identity and psychological functioning. The third study examined associations between narrative identity as measured by causal coherence and psychological processes utilising the Research Domain Criteria (RDoC) systems, using the same sample of 245 participants at Time 1 and a returning 88 participants at Time 2 (6 months later). Structural equation modelling revealed concurrent and longitudinal negative associations between difficulties in the negative valence system and causal coherence. Furthermore, lower causal coherence predicted later difficulties in the arousal/regulatory system. However, difficulties in the social processes system showed no such associations. The final study investigated the relationship between identification with psychopathology in turning point narratives and psychopathology symptoms. This study utilised the 245 community young adults from studies two and three, as well as 30 in-patient clinical young adults. A novel coding scheme was developed to tap identification with psychopathology within turning point narratives. Findings revealed that higher identification with psychopathology was associated with higher symptoms of depression, anxiety, BPD, rumination and emotion dysregulation. Multinomial regression analysis revealed that identification with psychopathology predicted an individual belonging to the symptoms or diagnosis group above and beyond measures of psychopathology. Moderation analyses revealed that the interaction between identification with psychopathology and belonging to the community group predicted depression, but not for the symptoms or diagnosis nor the clinical group. Overall, this thesis provides crucial insights into the dynamic relationship between narrative identity and psychological functioning, emphasising the significance of cognitive and emotional processes such as rumination and emotion dysregulation. Furthermore, this thesis introduces identification with psychopathology as a potentially important aspect of narrative identity. Understanding these complex relationships can lead to the development of personalised and targeted interventions with greater responsivity. Future longitudinal research that incorporates a range of narrative identity, transdiagnostic, and psychological functioning variables is recommended.