Essays on monetary policy

Abstract

The thesis has three self-contained chapters on monetary policy. Each chapter is an empirical study of state dependence of monetary policy impacts and covers over the period until the COVID-19 pandemic. The goal is to investigate whether and how states of household debt, the economic cycle, and sentiment influence the transmission and the effectiveness of monetary policy. The first chapter studies whether the level of household debt affects the transmission of monetary policy in Australia for the period 1994–2019. Using a state-dependent local projection model, we find that monetary policy is less effective when household debt is high than household debt is low, especially with respect to aggregate output, consumption, and investment. Durables expenditure and residential investment play an important role in driving the differences in aggregate output between the high and low states of household debt. The second chapter looks at Australian monetary policy again. But this time, it explores how the state of the economic cycle affects monetary policy. We identify the strong growth and weak growth states of the economy for the period 1994–2018 and estimate a smooth transition local projection model with this data. We find that the effects of monetary policy are less powerful during weak growth periods of the economy. The third chapter analyzes the effects of monetary policy during high and low periods of sentiment in the US. I estimate a self-exciting interacted vector autoregression model with data from 1960–2009. I find that the impacts of US monetary policy are weaker when sentiment is low. Especially, the responses of durables expenditure and investment to monetary policy shocks are much weaker in low sentiment periods. Our findings question the common wisdom that cuts in policy rates can stimulate the economy, calling for the study of alternative policy measures during the periods of slow economic growth, high household debt, and low sentiment.