Measuring the aggregate effects of Unconventional Monetary Policies

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In the summer of 2007, the US economy experienced a financial meltdown in which the burst of real estate bubble in conjunction with vast and growing imbalances played a significant role. This financial crisis is considered to be the worst since "The Great Depression", as its effects rippled throughout the global economy. At this point, the long-lasting beliefs about the role of Central Banks and existing policy instruments were challenged. During "normal times", the monetary policy rate (the rate of the main refinancing operations) is the usual benchmark for other interest rates relevant to firms and households. Changes in the rate by Central Banks, normally cause subsequent changes in the financing costs of households and firms. However, during times of severe disruption within the financial markets, a variety of problems emerge in the transmission channels, rendering the monetary policy inefficient. Despite the attempts of the Central Banks to mitigate recession by manipulating interest rates, it soon became evident that the conventional monetary policy toolkit was not influential enough, to restore the economic welfare. My aim is to evaluate the non-standard policy tools that the Central Banks [the European Central Bank (ECB), Federal Reserve (Fed) and Bank of England ( BOE)] executed in order to boost economic activity from the onset of the financial crisis. In particular, for each currency union, I will assess the measures undertaken and their joint impact on key macroeconomic variables. Furthermore, I will give critical focus on how the transmission channels of those actions performed in the restoration process of the impaired banks.MethodologyTo estimate the impact of these policies on the economy, I will use the Bayesian Methods which are widely known in macroeconomic modeling. The implementation of a Bayesian VAR model by incorporating large data sets of economic variables should yield to meaningful inferences. This type of models is useful when analysing interconnections between changes in interest rates and economic activity (Kapetanios et al. 2009). In addition, the sign restrictions on the impulse responses can capture to a great extent the shocks caused by monetary policy (Baumeister and Benati 2010). Another crucial issue is whether there are changes in the transmission mechanism of the policies over time. I propose to allow time variation using a time-varying structural model as Uhlig (2005) which can, also, shed light on how the economy reacted and to what extent over time to those shocks.My approach to enhance the communication tool of the Central Banks will be by incorporating the "news" series to a standard VAR, and ordering it first. Perotti (2011) has called these models "Expectational VARs". To make my results robust to the Federal Reserve Boards monetary policy, I will possibly use the federal funds' shadow rate which captures unconventional measures such as QE in the zero lower bound environment (Wu and Xia 2016).ConclusionsThe proposed research aims to examine the unconventional measures employed by Central Banks. By introducing the role of communication from Central Banks as an unconventional mechanism and formulating joint models that include all of the alternative measures, I expect to contribute to the academic literature and further expand the field of economics. This research, also, intends to shed light on whether unconventional monetary policies have the potential to become a standard tool for Central Banks and under which circumstances.