Essays on unconventional monetary policy and macroprudential policy

This thesis consists of six chapters focusing on unconventional monetary policy and macroprudential policy. Chapter 1 introduces the motivation for the thesis. Chapter 2 provides the theoretical background and literature review. The subsequent three chapters, chapters 3, 4, and 5, are the core chapters in the thesis. The first core chapter, chapter 3, examines the optimal strategic interaction between conventional and unconventional monetary policy. Precisely, the unconventional monetary policy considered in the study is the central bank credit injection or more known as quantitative easing. Using the model from Gertler and Karadi (2011) as the reference, the chapter investigates whether conventional and unconventional monetary policy should cooperate or be set independently and whether the two policies should be operated simultaneously or in leadership manner. The study measures the policy performance using an ad-hoc loss function constructed using the squared deviation of output, inflation, credit spread, nominal interest rate, and credit injection ratio from the steady state. This section demonstrates that the interaction between the two policies set simultaneously in cooperation with a fully optimal commitment regime delivers the best policy performance. The second core chapter, chapter 4, further examines optimal simple rules for the quantitative easing policy. This chapter generates three optimal simple rules for quantitative easing, namely the optimal simple rule based on lagged information (past time horizon), based on current information (current time horizon), and based on future expectation (future time horizon). The study uses the same ad-hoc loss function as in chapter one. This section demonstrates that policy performance from the optimal simple rule based on lagged information is superior to that of the current and future time horizon. Precisely, the optimal simple policy rule is optimally constructed by past leverage, capital price, and credit spread. Furthermore, we also demonstrate that higher central bank aggressiveness can stabilise the macroeconomy, but results in a lower policy performance. Finally, in chapter 5, this thesis investigates the interaction between monetary policy and macroprudential policy in a macroeconomic model with credit supply shock. Precisely, the chapter measures policy performance when the conventional monetary policy interacts with the capital adequacy ratio and the loan-to-value ratio. Using the model from Gerali, Neri, Sessa, and Signoretti (2010), and the ad-hoc loss function from Angelini, Nerri, and Panetta (2011), the study demonstrates that macroprudential policy promotes financial stability. Multiple policy instruments perform better than a single instrument but pose a risk of conflict. The study also demonstrates that the substitution effect among policy instruments can occur. Finally, chapter 6 provides conclusions and recommendations for future research