Essays on Unconventional Monetary Policies

Abstract

This dissertation contains three essays on unconventional monetary policies. Forward guidance during the zero lower bound period is typically modeled as news that alters the expected liftoff date of the policy rate, assuming that agents do not expect a policy rate hike in near future. In the first chapter, I empirically reject this assumption using U.S. high-frequency data and show that forward guidance affects the entire term structure of expected rates. Introducing this estimated forward guidance shock in a standard New Keynesian model substantially magnifies the “forward guidance puzzle". I show that allowing agents to update their macroeconomic expectations in the pessimistic direction following a forward guidance easing explains this larger puzzle per se, unlike the common approach of introducing a discount parameter due to a deviation from baseline assumptions. In addition, I find that the puzzle can also be explained by sticky information general equilibrium models. Central bank communication could be interpreted in two ways, either as central bank's commitment to a future action, known as Odyssean guidance, or its forecast of future economic conditions, known as Delphic guidance. The empirical literature has identified the Delphic and Odyssean components of forward guidance policies. In the second chapter, I show that another unconventional policy tool, large-scale asset purchases, can also be empirically decomposed into Delphic and Odyssean components, and these two components have opposing impacts on macroeconomic expectations in the US along with other advanced and emerging market economies. Finally, I estimate the asset price responses to Delphic and Odyssean policies. In the third chapter, I identify the Bank of England's forward guidance and quantitative easing surprises during the effective lower bound period in the UK. Then, I estimate asset price responses to these unconventional policies by local projections. I show that both surprises significantly move gilt yields and term premia on days of monetary policy announcements. However, their impact persists for only a few months. I further document that only forward guidance is effective in moving stock prices and their volatility. While both surprises influence the British pound, the impact of forward guidance persists for at least six months