Date of Award
Doctor of Philosophy (PhD)
This dissertation studies the Federal Reserve's unconventional monetary policy tools: the large-scale asset purchases (LSAPs) and the extended period of a near-zero interest rate policy (ZIRP).
In the first chapter, we simulate the Federal Reserve second LSAPs program in a dynamic stochastic general equilibrium (DSGE) model with bond market segmentation estimated on U.S. data. GDP growth increases by less than a third of a percentage point and inflation barely changes relative to the absence of intervention. The key reasons behind our findings are small estimates for both the elasticity of the risk premium to the quantity of long-term debt and the degree of financial market segmentation. Absent the commitment to keep the nominal interest rate at its lower bound for an extended period, the effects of asset purchase programs would be even smaller.
The second chapter studies the effects of the LSAPs and ZIRP in DSGE models from a broader and deeper perspective. LSAPs are ineffective (neutral operations) in standard DSGE models, and standard DSGE models forecast an increase in interest rates immediately after the recent recession, contradictory to the ZIRP conducted by the Federal Reserve. I study two mechanisms for breaking LSAPs' neutrality as in Chen, Curdia, and Ferrero (2012) and Harrison (2010) and two methods of modeling the ZIRP: the perfect foresight rational expectations model and the Markov regime-switching model which I develop. In this regime-switching model, in one regime, the policy follows a Taylor rule, while, in the other regime, it involves a zero interest rate. I also construct the optimal filter to estimate this regime-switching DSGE model with Bayesian methods. I simulate the U.S. economy and compare the predicted paths of the macro variables with and without the policy intervention. I find that the sole LSAPs intervention has an insignificant effect. Both regime-switching model and the perfect foresight model imply a substantial stimulative effect of ZIRP. However, the actual path is closer to the predicted path of the regime-switching model.
The third chapter further uses VARs that relax the DSGE model restrictions to examine the reason for the small effects of LSAPs measured in the DSGE models.
Chen, Han, "Essays on Unconventional Monetary Policy" (2013). Publicly Accessible Penn Dissertations. 622.