Essays on Monetary Policy

Download or read book Essays on Monetary Policy written by Omer Bayar and published by . This book was released on 2010 with total page 72 pages. Available in PDF, EPUB and Kindle. Book excerpt: Central banks use a series of relatively small interest rate changes in adjusting their monetary policy stance. This persistence in interest rate changes is well documented by empirical monetary policy reaction functions that feature a large estimated coefficient for the lagged interest rate. The two hypotheses that explain the size of this large estimated coefficient are monetary policy inertia and serially correlated macro shocks. In the first part of my dissertation, I show that the effect of inertia on the Federal Reserve's monthly funds rate adjustment is only moderate, and smaller than suggested by previous studies. In the second part, I present evidence that the temporal aggregation of interest rates puts an upward bias on the size of the estimated coefficient for the lagged interest rate. The third part of my dissertation is inspired by recent developments in the housing market and the resulting effect on the overall economy. In this third essay, we show that high loan-to-value mortgage borrowing reduces the effectiveness of monetary policy.