Conventional and unconventional monetary policy in a DSGE model with an interbank market friction
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This thesis examines both conventional and unconventional monetary policies in a DSGE model with an interbank market friction. The recent crisis during 2007-2009 affected economies worldwide and forced central banks to implement not just conventional monetary policies, but also direct interventions in ﬁnancial markets. We investigate a DSGE model with ﬁnancial frictions, to test conventional and unconventional monetary policies. The thesis starts by using the Gertler and Kiyotaki (2010)’s modelling framework, to examine eight different shocks under imperfect interbank market conditions. Unlike Gertler and Kiyotaki (2010) who consider the two extreme cases for the banking system, I ﬁrstly extend the analysis to a case in between the two extreme cases that they examined. The shocks considered include supply and demand shocks and also two shocks from the ﬁnancial system itself (an interbank market shock and a shock to the deposit market). It is found that a negative shock to the interbank market has only a moderate impact to the banking system. However, a shock to the deposit market has a much stronger impact. Even though the impacts of these shocks are not large it is shown that theﬁnancial frictions magnify the effects of other shocks. The model is extended to include price stickiness. A modiﬁed Taylor rule is analysed to test how conventional monetary policy should respond to the shocks in the presence of ﬁnancial frictions. Speciﬁcally the credit spread is added as a third term in the monetary policy rule. The stabilising properties of the policy rule are analysed and a welfare analysis is conducted. The model is further developed to include unconventional monetary policy in the form of direct lending to private sector ﬁrms from the central bank. A policy rule for unconventional policy is tested and its stabilising and welfare properties are analysed.
Thesis, PhD Doctor of Philosophy
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