Contemporary Central Banking - Analytical Perspectives

Abstract

This thesis considers the design of contemporary central bank policy from a theoretical perspective. In Chapter 1, we investigate the effects of central bank commitments to alternative monetary policy tools. We present a simple model to characterise central bank forward guidance, large scale asset purchases and yield curve control. Endogenous yield curve reactions to policy shocks are a key determinant of monetary conditions and can support or offset policy intentions. Alternative monetary policy tools allow the central bank to signal central bank private information to investors when the policy rate is at the effective lower bound, shaping yield curve reactions. Commitments to these tools offer policy certainty but can become time-inconsistent if the economy recovers sooner than expected. If commitments become time-inconsistent, endogenous yield curve tightening can offset excess stimulus. The strength of this offset, and the optimality of monetary conditions, improves with the precision of investor inferences of central bank private information. In Chapter 2, we examine the causal link between asset bubbles and wealth inequality in a twoagent macroeconomic model. Bubbles influence wealth inequality through two channels: altering the debt-asset ratio and fuelling speculation. When bubbles grow, they can temporarily decrease wealth inequality if asset prices rise faster than debt. However, when they burst, wealth inequality increases as the debt-asset ratio rises. Steady state wealth inequality is unaffected by bubbles if household types share symmetric speculative timing. Although macroprudential policy, communication, and leaning against the wind can reduce negative bubble effects on aggregate utility, they have a limited effect on wealth inequality. In Chapter 3, we introduce cautious expectations to a macroprudential policy model where average growth is traded off against growth-at-risk (GaR). Policymakers with cautious expectations estimate the optimal weight to apply to risk signals, creating biased, historically dependent crisis forecasts. They optimally downweight the effects of risk and their policy settings on GaR forecasts, decreasing the expected efficiency of the growth-GaR trade-off. This loosens the optimal policy stance, but also causes policymakers to respond more aggressively to changing signals. As policymakers experience additional crises, they better understand the effects of their policy instruments and tighten their stance. When past crises are forgotten, this tendency reverses.