Innovations in Monetary Policy

The turn of the century brought with it a period of stability, both for the global macroeconomy, but also for the consensus view of how monetary policy could and should operate within it. Policymakers and academics widely agreed that control of the short-term nominal interest rate was sufficient to achieve price stability and moderate the worst of the economic cycle. However, more recent history has shown this view of the world to be a best overly simplistic, and at worst, dangerously flawed. Short-term interest rates have become constrained by their lower bound and monetary policymakers have turned to a range of alternative, unconventional policy measures in pursuit of their objectives. This thesis looks to investigate some of the reasons why the previous paradigm failed and starts to assess the range of innovations that have come in to play as part of the fundamental reassessment of the policy framework. It does this from the point of view of theory, but also empirically, employing econometric techniques to quantify the impacts of recent large-scale asset purchase programmes by central banks. Finally, it looks to develop a detailed model which begins to address some of the limitations of the pre-crisis paradigm by including a role for money which can be created by either policymakers, or the financial sector

The impact of recent central bank asset purchase programmes

This article analyses the effectiveness of the asset purchase programmes implemented by the Federal Reserve and the Bank of England. Both the Federal Reserve's Large-Scale Asset Purchase (LSAP) programme and the Bank of England's Asset Purchase Facility (APF) had a significant impact on financial markets when the first stages were announced, but the effects became smaller for later extensions of the programmes. Applying a methodology developed by D'Amico and King (2010), we estimate that the lasting reduction in bond supply via central bank asset purchases lowered government bond yields significantly. The effect is largely similar for the LSAP and the APF. Our estimations also suggest that the Federal Reserve's new maturity extension programme (MEP) should have an effect on longer-term Treasury bond yields comparable to that of the outright asset purchases under the LSAP.

Non-Conventional Monetary Policies: QE and the DSGE literature

At the zero lower bound, the scale and scope of non-conventional monetary policies have become the key decision variables for monetary policy makers. In the UK, quantitative easing has involved the creation of a fund to purchase medium term dated government bonds with borrowed central bank reserves and so has increased the liquidity of the non-bank financial sector and temporarily eased the budget constraint of HMT. Some of these reserves have been used to increase the extent of capital held by banks and there have also been direct injections of capital into the banking system. We assess some of the issues arising from the three policies by using three separate DSGE models, which take seriously the role of financial frictions. We find that it is possible to correct the effects of a lower zero bound in DSGE models, by (i) offsetting the liquidity premium embedded in long term bonds and/or (ii) adopting countercyclical subsidies to bank capital able and/or (iii) the creation of central bank reserves that reduce the costs of loan supply. But the correct quantitative response and ongoing interaction with standard monetary policy remains an open question.zero bound, open-market operations, quantitative easing

Evaluating Asset-Market Effects of Unconventional Monetary Policy: A Cross-Country Comparison

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