Banks, Shocks and Monetary Policy

Essay 1: This paper studies the effect of monetary policy on the economy, distinguishing the effects of exogenous monetary policy shocks from information shocks that reveal the Federal Reserve's assessment of the economic outlook. To identify these two shocks, I exploit the difference in information content in public announcements by the Fed in its statements (released on decision days) and minutes of FOMC meetings (transcripts of the policy decision, released at a later date). Intuitively, the statements should give more information about monetary policy, while the minutes should contain more news about the economic outlook. I therefore maintain the assumption that the variances of monetary policy and information shocks should be different in statements and minutes. Following a similar approach to that of Rigobon and Sack (2003), I use an identification technique based on the heteroskedasticity of the two shocks. I find that the Fed does know more about macro variables and that monetary policy and information shocks have important but different effects on asset prices. Last, when I separate policy and information shocks, I find stronger effects of monetary policy on macroeconomic variables than when I use standard high-frequency identification.Essay 2: We investigate whether it is desirable to augment the standard Taylor rule with a response to developments in the credit market under different expectations schemes. We use a DSGE model with housing and credit markets, together with a banking sector, under both rational and extrapolative expectations. We develop a new approach to extrapolative expectations that ensures that both versions of the model have identical microfoundations. We consider an exogenous rise in risk appetite within the banking sector, and by using welfare analysis, we find that credit spread targeting leads to higher social welfare under both rational and extrapolative expectations. However, the optimal credit targeting coefficient in the Taylor rule depends on how the expectations are formed and is larger under extrapolative expectations. Our contribution illustrates the importance of the nature of expectations for the evaluation of alternative monetary policy rules.Essay 3: This article analyzes the link between banks' balance sheets and monetary policy. Using Danish bank data, I investigate whether banks' holdings of financial assets and liabilities affect the pass-through of changes in the monetary policy rate to lending rates. To study this question, I use panel data summarizing the balance sheet items of 15 banks that together cover more than 75 percent of the Danish lending market. Estimates with the local projection method are uncertain but indicate that when the policy rate rises, banks with relatively more fixed income assets than average become more capital constrained and consequently have higher pass-through, and banks relying more heavily than average on money market funding have higher pass-through. My results show that banks' liquidity positions are important determinants of monetary policy pass-through to lending rates