Essays on monetary policy

Abstract

This doctoral dissertation studies questions related to monetary policy and its economic effects. Particularly, the focus is on questions that have been relevant from the point of view of both practical policymaking as well as academic research in the recent decades. The dissertation consists of an introductory chapter and three distinct research essays. The two first essays are empirical, while the third one is more theoretical in nature. The first essay examines the role of stock and currency market information in the monetary policy rules of 14 OECD countries during the period of 1999– 2016. The results show that both the stock market as well as currency market variables have been statistically significant predictors in the monetary policy rules of several OECD countries. Additionally, the results indicate that stock and currency market variables have had significance for monetary policy through their potential role in providing information about future economic activity. The second essay examines the influence of United States monetary policy on the monetary policies of four small open economies. The results indicate that US monetary policy has systematically influenced the monetary policies especially in Canada and the UK. Moreover, surprise developments in US monetary policy are shown to affect the interest rates in Canada, Norway, and Sweden, although the strength of this result is somewhat dependent on the empirical method used. In addition, the essay studies whether the small open economies have utilised foreign exchange interventions to enhance their monetary policy autonomy. This hypothesis is not supported in light of the empirical results of the study. The third essay builds a theoretical general equilibrium model that analyses the extent to which the economic effects of the central bank’s quantitative easing are dependent on the fiscal policy conducted by the government. It is shown that the effectiveness of quantitative easing depends on whether the government adjusts its budget constraint through changes in taxation or by issuing debt. In the latter scenario, it is shown that quantitative easing is more effective when the government is issuing bonds of long maturity.