Essays on monetary policy before and after the crisis

Abstract

In Chapter 1 I brie y introduce the issues that will be studied in Chapter 2 and 3. In Chapter 2 I introduce a macroprudential policy for the cap on debt-to-income (DTI) ratio in a model which is estimated over the period of the build-up of household debt occurred in US before the financial crisis. The optimal macroprudential policy requires a more important role for labor income in credit supply decision and a strong countercyclical response of the cap on DTI to household debt. I find that this optimal macroprudential policy is successful in stabilizing household debt, is beneficial in terms of social welfare and is desirable as a complement for monetary policy, when this is enforced as a standard Taylor rule. I then consider also a monetary policy that can "lean against the wind" of a credit boom to pursue financial stability. It turns out that this policy is welfare-dominated by the strategy of assigning this goal to a macroprudential authority committing to optimally implementing the cap on DTI. However, the best-performing policy is a combination of "leaning against the wind" strategy and macroprudential policy. In Chapter 3 I study optimal government spending and monetary policy in an economy hit by a liquidity shock, which may generate recession and de ation. I find that the optimal policy mix implies a money-financed fiscal stimulus, which is shaped as a one-period countercyclical fiscal stimulus along with a prolonged central bank's balance-sheet expansion. By comparing this optimal policy with other suboptimal policies we uncover several facts. First, an unconventional monetary policy performs unambiguously better when accompanied by a fiscal stimulus. Second, financing the stimulus with only public debt brings about long-lasting recession and de ation. Third, "active" monetary policies, like the standard Taylor rule, "in ation targeting" and "nominal GDP targeting" are efficient policies if the increase in money supply brought about by these policies is complemented with an optimal fiscal stimulus.In Chapter 1 I brie y introduce the issues that will be studied in Chapter 2 and 3. In Chapter 2 I introduce a macroprudential policy for the cap on debt-to-income (DTI) ratio in a model which is estimated over the period of the build-up of household debt occurred in US before the financial crisis. The optimal macroprudential policy requires a more important role for labor income in credit supply decision and a strong countercyclical response of the cap on DTI to household debt. I find that this optimal macroprudential policy is successful in stabilizing household debt, is beneficial in terms of social welfare and is desirable as a complement for monetary policy, when this is enforced as a standard Taylor rule. I then consider also a monetary policy that can "lean against the wind" of a credit boom to pursue financial stability. It turns out that this policy is welfare-dominated by the strategy of assigning this goal to a macroprudential authority committing to optimally implementing the cap on DTI. However, the best-performing policy is a combination of "leaning against the wind" strategy and macroprudential policy. In Chapter 3 I study optimal government spending and monetary policy in an economy hit by a liquidity shock, which may generate recession and de ation. I find that the optimal policy mix implies a money-financed fiscal stimulus, which is shaped as a one-period countercyclical fiscal stimulus along with a prolonged central bank's balance-sheet expansion. By comparing this optimal policy with other suboptimal policies we uncover several facts. First, an unconventional monetary policy performs unambiguously better when accompanied by a fiscal stimulus. Second, financing the stimulus with only public debt brings about long-lasting recession and de ation. Third, "active" monetary policies, like the standard Taylor rule, "in ation targeting" and "nominal GDP targeting" are efficient policies if the increase in money supply brought about by these policies is complemented with an optimal fiscal stimulus.LUISS PhD Thesi