Download or read book Essays on Optimal Monetary Policy and Financial Frictions written by Nan Sheng and published by . This book was released on 2014 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Three Essays on Monetary Policy in Economies with Financial Frictions written by Rahul Anand and published by . This book was released on 2010 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: The objective of this dissertation is to understand the role of financial frictions in the transmission of shocks and their effect on the monetary policy transmission mechanism. To accomplish the task, we develop Dynamic Stochastic General equilibrium models with financial frictions. In the first chapter, we develop a model to analytically determine the appropriate price index to target in the presence of financial frictions (where a fraction of households are constrained to consume their wage income each period). The analysis suggests that in the presence of financial frictions, a welfare-maximizing central bank should adopt flexible headline inflation targeting-i.e. a headline inflation target but with some weight on the output gap. These results are particularly relevant for emerging markets, where the share of food expenditures in total consumption expenditures is high and a large proportion of consumers are credit constrained. In the second chapter, we develop a small open economy model with macrofinancial linkages. The model includes a financial accelerator - entrepreneurs are assumed to partially finance investment using domestic and foreign currency debt - to assess the importance of financial frictions in the amplification and propagation of the effects of transitory shocks to productivity, interest rates and net worth of firms. We use Bayesian estimation techniques to estimate the model using India data. The model is used to assess the importance of the financial accelerator in India and to assess the optimality of the current monetary policy rule. In the third chapter, we develop a small open economy New Keynesian model with financial frictions and an active banking sector for India. We find that the presence of a monopolistic banking sector with sticky interest rate setting attenuates the shocks. However, if the interest rates are flexible it results in the amplification of shocks. We also find that an unexpected reduction in bank capital can have a substantial impact on the real economy and particularly on investment. Use of nonmonetary policy tools result in greater volatility as compared to when central banks use traditional monetary tightening.

Download or read book Financial Frictions Business Cycles and Optimal Monetary Policy written by Zulfiqar Hyder and published by . This book was released on 2015 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: The great recession that started in 2007, has not only changed the perspective of the macroeconomic literature about the role of financial frictions within the canonical New Keynesian (henceforth, NK) monetary models but also has rekindled the debate about sources of business cycle fluctuations. This dissertation, comprising of three self-contained essays, makes theoretical and empirical contributions to the emerging strands of literature incorporating financial frictions in the NK monetary models. The first essay (Chapter 2) of this dissertation extends traditional optimal monetary policy analysis to NK models with capital and financial frictions. In the case of a negative productivity shock, the chapter finds that: 1) a standard inflation targeting rule dominates the Taylor rule in both NK models without capital and with capital as it approximates the welfare level associated with the Ramsey policy; 2) in the NK model with capital and with financial frictions, the relative performance of the economy under standard inflation targeting is much better compared to alternative policies because it approximates Ramsey monetary policy. In the case of a financial shock, the chapter shows that the inflation targeting rule provides a welfare level that is close to the welfare level achieved under optimal monetary policy under commitment. In addition, Ramsey policy under commitment performs well in response to a financial shock, compared to alternative monetary policy regimes, by aggressively minimizing the impact of financial constraints on the interest rate spread. The second essay (Chapter 3) estimates the importance of financial shocks in business cycle fluctuations for the US economy using structural VAR models. In that chapter, financial and non-financial shocks are identified with a minimum set of sign restrictions based on the two competing NK models: the standard NK model augmented with a financial accelerator and the NK model augmented with financial intermediaries. Estimation results show that a financial shock, emanating both from entrepreneur's net worth and financial intermediaries net worth, is prominent in explaining fluctuations in real output and interest rate spread. As far as the relative importance of these two financial shocks is concerned, the following results stand out. A financial shock related to the demand side is relatively the major driver of output fluctuations in both time horizons while financial shocks related to financial intermediaries explain a moderate variation in output fluctuations in both time horizons. In addition, financial shocks related to financial intermediaries account for a relatively larger share of interest rate spread fluctuations at both time horizons compared to a financial shock related to the demand side. The third essay (Chapter 4) extends Gertler and Karadi's model (2011) into a two-sector setting. The Two-Sector Financial Accelerator model not only helps to incorporate the differences in the leverage ratios of commercial and investment banks but also introduces additional shocks that capture some features of the sub-prime financial crisis in the simulated economy. The results also show that output recovery would remain slow in the simulated economy as long as the relative price of non-consumption goods is not recovered to its trend.

Download or read book Essays on Macroeconomics and Monetary Economics written by Fatih Tuluk and published by . This book was released on 2016 with total page 138 pages. Available in PDF, EPUB and Kindle. Book excerpt: My essays that are captured in two chapters of my dissertation focus on shadow banking system, collateralized debt arrangement and monetary policy. The first chapter studies the role of shadow banking in the recent financial crisis, the relationship between shadow banking and traditional banking, and it investigates the monetary policy reaction to overcome the financial frictions associated with the scarcity of collateral or shortages of safe assets that naturally led to the liquidity constraints. On the other hand, the second chapter studies the role of housing as a collateral or as a medium of exchange and it explores how the private liquidity, in the context of home-equity loans, and public liquidity work together to overcome the limited commitment frictions. In the first chapter, a Lagos-Wright model with costly-state verification and delegated monitoring financial intermediation, and a risk-sharing framework of banking is constructed. Lack of memory and limited commitment imply collateralized credit arrangements. In contrast to the traditional banking system, shadow banking system is not subject to the capital requirements. The relative use of shadow funded credit versus traditional bank loans entails the advantages of working outside the oversight of the bank regulations, but drawbacks of having information and transactions cost in funding entrepreneurs. I have five main findings: First, an entrepreneurial credit can help address the need for collateral. Second, the shadow funded credit shifts from risky to safer borrowers and loan creation capacity of the shadow banking sector shrinks when the economic outlook gets worse. Third, the traditional bank can fulfill the role of providing credit that shadow banks had played before the crisis, but can do it only to a certain extent. Fourth, to the extent that collateral backed by entrepreneurial credit mitigates the limited commitment friction in the traditional banking sector, the optimal monetary policy shifts nominal interest rate towards zero lower bound. Lastly, the quantitative easing program can be welfare increasing by reinforcing the shadow funded credit versus traditional banking lending if the credit frictions in the shadow banking sector are sufficiently small. The second chapter studies the role of home-equity loan and government debt in an environment with financial frictions. I construct a Lagos-Wright model in which private transactions must be secured under limited commitment and lack of record-keeping. Housing can be useful to support credit since it serves as collateral. It also gives direct utility as shelter and serves as a medium of exchange when the economy is inefficient. I show that when there is no efficiency loss due to exchange of housing, posting collateral is not optimal since collateralizable wealth is limited. In the state of efficiency loss, the collateral might be useful and the asset therefore bears a liquidity premium. However, once collateral becomes scarce - as it did during the financial crisis- then it amplifies the frictions and the buyer trades the asset to make up for the weak incentives associated with collateral. I show that the world is always non-Ricardian and therefore government debt implies higher welfare. As well, government debt enhances the private debt to the extent that posting collateral is always optimal. In equilibrium, full pledgeability of private collateral, in addition to government debt, completely rules out the efficiency loss arising from exchange of asset. Money and private banks are introduced. I show that as inflation imposes a tax on consumption, interest rate on cash loans imposes a tax on housing collateral. Finally, an increase in inflation raises the housing price near Friedman Rule.

Download or read book Essays on Monetary Policy with Informational Frictions written by Chengcheng Jia and published by . This book was released on 2008 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: Lastly, I show the optimal monetary policy is rule-based Odyssean forward guidance, which is a state-contingent commitment that specifies how the central bank reacts to both the actual shock and the noise in its own information.

Download or read book Optimal Monetary Policy with Uncertainty about Financial Frictions written by Richhild Moessner and published by . This book was released on 2006 with total page 32 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Essays on Liquidity Informational Frictions and Monetary Policy written by Kee Youn Kang and published by . This book was released on 2017 with total page 86 pages. Available in PDF, EPUB and Kindle. Book excerpt: The dissertation, which consists of two chapters, is devoted to exploring the role of informational friction in monetary economics and finance.Chapter I: COUNTERFEITING, SCREENING AND GOVERNMENT POLICY.In this chapter, I construct a search theoretic model of money in which counterfeit money can be produced at a cost but agents can screen for fake money also at a cost. Counterfeiting can occur in equilibrium when both costs and the inflation rate are sufficiently low. Optimal monetary policy is the Friedman rule. However, the rationale for the Friedman rule in an economy with the circulation of counterfeit money differs from the conventional mechanism that holds in the model when counterfeiting does not occur. I also study optimal anti-counterfeiting policy that determines the counterfeiting cost and the screening cost.Chapter II: CENTRAL BANK PURCHASES OF PRIVATE ASSETS: AN EVALUATIONIn this chapter, I develop a model of asset exchange and monetary policy, augmented to incorporate a housing market and a frictional financial market. Homeowners take out mortgages with banks using their residential properties as collateral to finance consumption. Banks use mortgages and government liabilities as collateral to secure deposit contracts, but they have an incentive to fake the quality of mortgages at a cost. Quantitative easing (QE) in the form of central bank purchases of mortgages from private banks has effects on the composition of assets in the economy, and on the incentive structure of the private sector. When the incentive problem is severe, the central bank can unambiguously improve welfare by purchasing mortgages. However, when it is not severe, the central bank's mortgage purchases cause a housing construction boom and sometimes can lower exchange in the economy, hence reducing welfare.

Download or read book Essays on Optimal Monetary Policy in an Open Economy written by David Macy Arseneau and published by . This book was released on 2004 with total page 262 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Essays on Optimal Monetary Policy written by Kosuke Aoki and published by . This book was released on 2000 with total page 324 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Essays on Macroeconomics with Financial Frictions written by Dominik Thaler and published by . This book was released on 2016 with total page 104 pages. Available in PDF, EPUB and Kindle. Book excerpt: The first chapter of this thesis, joint with Angela Abbate analyses the importance of the risk-taking channel for monetary policy. To answer this question, we develop and estimate a quantitative monetary DSGE model where banks choose excessively risky investments, due to an agency problem which distorts banks’ incentives. As the real interest rate declines, these distortions become more important and excessive risk taking increases, lowering the efficiency of investment. We show that this novel transmission channel generates a new and quantitatively significant monetary policy trade-off between inflation and real interest rate stabilization: it is optimal for the central bank to tolerate greater inflation volatility in exchange for lower risk taking. The second chapter develops a quantitative model of sovereign default with endogenous default costs to propose a novel answer to the question why governments repay their debt. In the model domestic banks are exposed to sovereign debt. Hence sovereign default causes large losses for the banks, which translate into a financial crisis. The government trades these costs off against the advantage of not repaying international investors. Besides replicating business cycle moments, the model is able to generate not only output costs of a realistic magnitude, but also endogenously predicts that default is followed by a period during which no new foreign lending takes place. The duration of this period matches empirical estimates. The third chapter outlines a method to reduce the computationally necessary state space for solving dynamic models with global methods. The idea is to replace several state variables by a summary state variable. This is made possible by anticipating future choices that depend on one of the replaced variables. I explain how this method can be applied to a simple portfolio choice problem.

Download or read book Essays on Optimal Monetary Policy written by Xiaoguang Yuan and published by . This book was released on 2020 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Essays on Credit Frictions Debt Choice and the Business Cycle written by Julian Karl Douglas Wright and published by . This book was released on 1995 with total page 212 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Essays on Optimal Monetary Policy written by Ali Hakan Kara and published by . This book was released on 2002 with total page 298 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Optimal Monetary Policy in a Small Open Economy with Financial Frictions written by Rossana Merola and published by . This book was released on 2010 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Essays in Monetary Policy written by Gaoyan Tang and published by . This book was released on 2014 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation presents three chapters addressing issues pertaining to monetary policy, information, and central bank communication. The first chapter studies optimal monetary policy in an environment where policy actions provide a signal of economic fundamentals to imperfectly informed agents. I derive the optimal discretionary policy in closed form and show that, in contrast to the perfect information case, the signaling channel leads the policymaker to be tougher on inflation. The strength of the signaling effect of policy depends on relative uncertainty levels. As the signaling effect strengthens, the optimal policy under discretion approaches that under commitment to a forward-looking linear rule, thereby decreasing the stabilization bias. This contributes to the central bank finding it optimal to withhold its additional information from private agents. Under a general linear policy rule, inflation and output forecasts can respond positively to a positive interest rate surprise when the signaling channel is strong. This positive response is the opposite of what standard perfect information New Keynesian models predict and it matches empirical patterns found by previous studies. Chapter 2 provides new empirical evidence supporting the predictions of the model presented in Chapter 1. More specifically, I find that the responses of inflation forecasts to interest rate surprises is especially positive when there is greater uncertainty regarding the previous forecast. Finally, Chapter 3 examines whether communications by the Federal Open Market Committee might have the ability to influence financial market responses to macroeconomic news. In particular, I am able to relate labor-related word use in FOMC statements and meeting minutes to the amount by which interest rates' response to labor-related news exceeds their response to other news.

Download or read book Essays on Unconventional Monetary Policies written by Stephen John Cole and published by . This book was released on 2015 with total page 154 pages. Available in PDF, EPUB and Kindle. Book excerpt: The three chapters in this dissertation analyze the unconventional monetary policy tools that were utilized in response to the global financial crisis of 2007-2009. Chapter 1 examines the degree of misspecification in a mainstream DSGE model with unconventional monetary policy using the DSGE-VAR approach. The findings indicate that this type of model exhibits a high level of misspecification. For instance, estimation results point to the data favoring an unrestricted vector autoregression model over a DSGE model with unconventional monetary policy. Thus, policymakers should exercise caution when using new macroeconomic models that incorporate unconventional monetary policy. Chapter 2 examines the link between expectations formation and the effectiveness of central bank forward guidance. In a standard New Keynesian model, agents form expectations about future macroeconomic variables via either the standard rational expectations hypothesis or a more plausible theory of expectations formation called adaptive learning. The results show that the efficacy of forward guidance depends on the manner in which agents form their expectations. During an economic crisis (e.g. a recession), for example, the assumption of rational expectations overstates the effects of forward guidance relative to adaptive learning. Specifically, the output gap is higher under rational expectations than adaptive learning. Thus, if monetary policy is based on a model with rational expectations, which is the standard assumption in the macroeconomic literature, the results of forward guidance could be potentially misleading. Chapter 3 investigates the effectiveness of forward guidance while relaxing two standard macroeconomic assumptions: rational expectations and frictionless financial markets. A standard DSGE model is extended to include the financial accelerator mechanism. The results show that the addition of financial frictions amplifies the differences between rational expectations and adaptive learning to forward guidance. During a period of economic crisis (e.g. a recession), output under rational expectations displays more favorable responses to forward guidance than under adaptive learning. These differences are exacerbated when compared to a similar analysis without financial frictions. Thus, monetary policymakers should consider the way in which expectations and credit market frictions are modeled when examining the effects of forward guidance.

Download or read book Three Essays on Imbalances in a Monetary Union written by Ida Maria Hjortsø and published by . This book was released on 2012 with total page 144 pages. Available in PDF, EPUB and Kindle. Book excerpt: This thesis investigates the implications of imbalances within a monetary union. In the first chapter, I study how international financial frictions lead to international imbalances and affect optimal fiscal policy in a two-country, two-good DSGE model of a monetary union. I show that the presence of international imbalances affects the optimal conduct of cooperative fiscal policies when the traded goods are complements. Government expenditures optimally play a cross-country risk sharing role which is in conflict with the domestic stabilization role: optimal fiscal policy consists in setting government expenditures such as to reduce international imbalances at the expense of higher domestic inefficiencies. In the second chapter, I assess the implications of strategic fiscal policy interactions in a two-country DSGE model of a monetary union with nominal rigidities and international financial frictions. I show that the fiscal policy makers face an incentive to set fiscal policy such as to switch the terms of trade in their favour. This incentive results in a Nash equilibrium characterized by excessive inflation differentials as well as sub-optimally high current account imbalances within the monetary union. There are thus non-negligeable welfare losses associated with strategic fiscal policy making in a monetary union. The third chapter investigates empirically the degree of risk sharing in the European Economic and Monetary Union (EMU), using two different methods. The first measure relates to the capacity of consumption smoothing. This measure indicates that risk sharing is rather low and that the introduction of the common currency did not lead to higher intra-EMU risk sharing. The second measure is based on the welfare losses associated with deviations from full risk sharing. These welfare losses have fallen since the introduction of the common currency. However, this is mostly due to changes in macroeconomic risk - not to changes in risk sharing per se.