RT Dissertation/Thesis
T1 Unconventional monetary policy : theoretical foundations, transmission mechanisms and policy implications
A1 Schmidt,Benjamin
WP 2018/06/11
AB The financial crisis of 2007-09 can be divided into a ’pre-Lehman’ and a ’post-Lehman’ episode. The ’pre-Lehman’ episode lasted from August 2007 to September 2008 and was largely confined to distressed European and US money markets. In comparison, the ’post-Lehman’ episode was characterized by a global economic slump, deflationary risks, and policy rates at the effective lower bound in most advanced and many emerging economies. Accordingly, part I of this thesis starts with the monetary policy Response to the ’pre-Lehman’ turmoil on interbank markets, while part II addresses unconventional monetary policies at the zero lower bound. Finally, part III provides a theoretical and empirical assessment of their macroeconomic consequences. Beyond that, it also includes a short discussion on potential exit strategies from unconventional monetary policies.
Part I: After a preliminary discussion of the way monetary policy is implemented in normal times, chapter 2 presents a simple corridor model of the reserve market. Subsequently, this model is used to describe some crisis-driven innovations in monetary policy frameworks. The key result of this chapter is that by replacing large parts of the malfunctioning interbank market with central bank intermediation, the Fed and the ECB succeeded in preventing an ’adverse spiral’ that may have easily unfolded from the heightened uncertainty among money market participants.
As monetary policy in the ’post-Lehman’ era increasingly turned towards lowering the term-premium component of longer-term rates, chapter 3 highlights that the precrisis workhorse model of monetary policy analysis – the baseline New Keynesian model (NKM) – is inappropriate to capture such effects. The reason is that the NKM assumes rational expectations, perfectly flexible financial markets, and the existence of the pure expectations theory of the term structure, which altogether offer the rationale for the Wallace neutrality of central bank open market operations (Wallace, 1981). Accordingly, the chapter ends with the conclusion that most standard dynamic stochastic General equilibrium models (DSGE) lack the conditions conducive for central bank asset purchases to have a direct effect on either nominal or real economic variables.
Part II: The second part starts with a basic classification of unconventional monetary policies. Those are: (i) forward guidance, (ii) quantitative vs. qualitative easing, and, (iii)negative policy rates. In a next step, I construct a preferred-habitat model of the term structure, which provides the theoretical foundation for the portfolio balance channel of central bank asset purchases (see chapter 4.2.)
Chapter 5 sheds further light on the transmission channels of unconventional policies. In this context, the predictions of economic theory are cross-checked with the empirical evidence for the US, the UK, and the euro area. Since the focus of this thesis lies on the euro area, in chapter 6, I follow Altavilla et al. (2015) and conduct an event study on the ECB’s asset purchase program (APP). In contrast to previous studies, I investigate the set of all official ECB announcements related to the APP over the period from 2014 to 2016. Moreover, I do not confine the analysis to sovereign and corporate bond yields and, thus, provide a more comprehensive perspective on the impact of QE in the euro area. Beyond bond yields, I assess the impact on the European stock markets, on inflation expectations, and on various euro exchange rates. Consistent with the credit risk augmented preferred-habitat theory of chapter 4.2, I find that the APP significantly reduced Italian and Spanish government bond yields, while the effects on German and French yields were much less pronounced. This points to a portfolio balance effect that runs primarily through country-specific risk premia.
Beyond its impact on sovereign bonds, the APP also significantly lowered the yields on euro area corporate bonds (both financial and non-financial). While the announcements led to a significant depreciation of the euro against the US dollar, I do not observe a significant effect on expected inflation and interbank swap rates. Hence, the signaling channel and the Inflation reanchoring channel seem to be less important in the euro area than in the US (see e.g. Bauer and Rudebusch, 2014).
Part III: Although the immediate impact on financial markets might be a necessary precondition for the effectiveness of unconventional monetary policy, its ultimate Goal is to stabilize inflation and stimulate economic activity. In turn, part III deals with the macroeconomic effects of central bank asset purchases. In this context, firstly, the Impact of QE on the banking system is addressed. By taking a closer look at the empirical evidence for the credit channel in the UK, the euro area and the US, I reach the conclusion that with the ongoing deterioration in bank capital and the persistent economic slump that followed the failure of Lehman Brothers, the positive impact of additional liquidity increasingly receded. Instead, in the ’post-Lehman’ era, any stimulating effect of monetary policy on bank lending acted mainly through the bank capital channel.
Given the prevalence of the portfolio balance effect, chapter 8 provides a detailed discussion within a modern DSGE set-up. By drawing on earlier insights from the preferred-habitat theory, this chapter highlights the macroeconomic implications of market segmentation and limits to arbitrage for the effectiveness of central bank asset purchases.
In chapter 8.4, I follow Harrison (2012) and extend the portfolio balance model by including financial intermediaries and the zero lower bound on the short-term policy rate. Thereby, I am able to explicitly account for two separate policy instruments at the disposal of the central bank: conventional interest rate policy and central bank Balance sheet operations. This enables me to simulate the impulse response functions of central bank asset purchases in case of a binding and non-binding zero lower bound. Consequently, the simulation exercise underlines the important result that asset purchases are particularly powerful in stabilizing the macroeconomy at the zero lower bound of the short-term policy rate. 
However, the DSGE simulations provide only a qualitative validation for the theoretical predictions about the portfolio balance effect. Therefore, in chapter 9, I conduct a meta study on the existing empirical evidence concerning the macroeconomic effectiveness of unconventional monetary policies in the US, the UK, and the euro area. And while there is a great dispersion among the individual estimates, it seems evident that the macroeconomic impact of the ECB’s asset purchase program was substantially smaller than those of the Federal Reserve and the Bank of England.
Finally, chapter 10 outlines some broad principles with respect to exiting unconventional monetary policies. A key finding of this chapter is that a successful exit strategy should likely involve the following steps: first, forward guidance concerning the expected path of future interest rates; second, the application of temporary reserve drainage operations and/or reserve requirements; third, stopping the reinvestment of maturing assets on the central bank’s balance sheet and, ultimately, the use of asset sales.
Furthermore, I argue that potential central bank losses should not pose a serious constraint on plausible exit scenarios. Chapter 11 concludes.
K1 Geldpolitik
K1 Transmission
K1 Makroökonomie
K1 Volkswirtschaftslehre
K1 Event Studie  
PP Hohenheim
PB Kommunikations-, Informations- und Medienzentrum der Universität Hohenheim
UL http://opus.uni-hohenheim.de/volltexte/2018/1483