Essays on Monetary and Macro-prudential Policy

Abstract

This dissertation comprises three essays that investigate the transmission mechanism of monetary policy and the interaction between monetary policy and macro-prudential policy. In Chapter 1, I examine the costs and benefits of coordinating monetary policy and macro-prudential policy. I obtain that the coordination between monetary and macro-prudential policies helps reducing the risk of entering into a financial crisis; helps also speeding up the exit from the crisis, if any; but implies further variability in inflation and in employment gap which is costly.

In Chapter 2, I explore the interaction between monetary policy and macro-prudential policy in economies in which the natural rate of return occasionally attains negative values. In those economies, the zero-lower-bound (ZLB) constraint on the nominal interest rate occasionally prevents monetary policy from conducting its conventional task of replicating the natural rate of return with the nominal rate. I obtain that tighter macro-prudential policies, that restrict intermediary leverage more severely, mitigate the aggregate fluctuations resulting from frictions in financial markets; lift the natural rate of return; and whence facilitate the conventional task of monetary policy.

In Chapter 3, I revisit the transmission mechanism of monetary policy in the context of a financially developed economy in which the provisions of settlement services and of financial intermediary services are highly interrelated. To this end, I develop a framework in which the joint provision of settlement and financial intermediary services creates a liquidity management problem at the intermediary level, and a corresponding demand for liquid assets. I analyze the real effects of unconventional monetary policies that target the width of the corridor between the discount window rate and interest rate on excess reserves. I obtain that the real effects of a narrower corridor in general depend on how liquid the financial intermediary system is.