Unconventional monetary policy of UK : The study through a SOE-DSGE model

This thesis aims to investigate the impact of unconventional monetary policy through banking lending channel in the UK. The Dynamic Stochastic General Equilibrium (DSGE) model is built following the Smets and Woulters (2007) and adjusted by incorporating the financial accelerator, then extended to an Armington (1969) version small open economy. We evaluate and estimate the model by Indirect Inference method with the un-filtered non-stationary data from 1985Q1 to 2016Q4. The model with estimated parameters significantly passes the Indirect Inference test and describes the UK economy well. The empirical study based on estimated model approves the significance of financial intermediary in the transmission mechanism of quantitative easing, which can substantially enhance the economy's stability by the bank lending channel, particularly during the crisis time of zero lower bound. And we find that the shocks from financial sectors play a significant role in the recession, but they are not sufficient to make a big economic crisis. The alternative monetary policy, including price-level targeting and nominal GDP targeting, are also investigated. By measuring and comparing the frequency of crisis and the welfare cost, the monetary regime with the combination of nominal GDP targeting and monetary reform performs the best