Essays on Unconventional Monetary Policies

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

Income Distribution and Economic Crises

This paper analyzes the relationship between income distribution and the severity of economic crises, where the severity is measured by the length and the depth of the recessions. Using an extensive panel dataset on income distribution and employing an event study framework, we find significant evidence that there is a negative association between the prevailing degree of income inequality and the severity of the recessions. In the case of high income countries that have bad income distribution, however, recessions are observed to be longer than the average. This observation is likely to result from the combination of the strong status-quo bias of the financially powerful income groups and the available means to redistribute towards the poor so as to help mitigate the pressures for reforms to improve income distribution via creative destruction. The longer period of recessions observed in developed countries than in less developed countries in the aftermath of the Great Recession is in support of this argument. The findings also reveal that recessions tend to be longer during the decade of the 1990s than the rest of the period studied. The evidence regarding the corrective effect on the recessions of accommodative fiscal or monetary policy stance, measured by the size of the government and the inflation rate, is observed to be only barely significant on average. Wirh regard to the impact of recessions on income distribution, the evidence in the paper indicates that the post-crises income distribution worsens significantly with the length but improves with the depth of the preceding recession. We also note that, in addition to the persistence effect, the lack of monetary discipline worsens income distribution in the postcrises period significantly

Essays on Unconventional Monetary Policies

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