Work detail

Essays on Monetary Policy

Author: Jan Žáček (15.9.2021)
Year: 2021 - summer
Leaders: doc. Mgr. Tomáš Holub Ph.D.
Work type: Dissertations
Language: English
Pages: 221
Awards and prizes:
Abstract: The dissertation thesis consists of three research papers in the field of monetary policy. All three papers connect the same topic -- monetary policy rules. The first two papers focus on monetary policy rules augmented with financial variables from a theoretical point of view, while the third paper provides international empirical evidence on the monetary policy conduct taking into account financial cycle developments.
In the first paper I employ a small-open economy dynamic stochastic general equilibrium (DSGE) model to examine whether the central bank's direct reaction to asset prices or credit-to-GDP ratio brings macroeconomic benefits in terms of lower volatility of inflation and output. I find that direct reaction to asset prices can be beneficial for a central bank; however, the result holds only for some domestic shocks. When facing shocks originating abroad, the usefulness of the augmented monetary policy rule deteriorates. Overall, the performance of the rule augmented with asset prices is shock-dependent, and therefore, any strict rule-like behaviour for a central bank operating within a small open economy is not optimal.

In the second paper I address the role of nonlinearities in a DSGE model and their impact on the performance of the Taylor rule augmented with asset prices. Specifically, I introduce an occasionally binding credit constraint based on a penalty function approach into a DSGE model with firm balance-sheet and bank-lending channels. First, I demonstrate that the model with an occasionally binding credit constraint has more favourable properties than an eternally binding credit constraint model. Second, I inspect the implications of the monetary policy rule augmented with asset prices both in the setting with the occasionally binding credit constraint and its eternally binding counterpart. I show that both approaches deliver different results.

In the last paper, together with my co-author, we provide empirical evidence on monetary policy and its relation to financial cycle developments. We use a multivariate structural time series model to
estimate financial cycles. Then we provide estimates of the augmented time-varying monetary policy rules. On a sample of seven inflation-targeting countries (ranging from New Zealand, across Sweden to the United States), we show that most central banks in the sample considered financial cycles in their reaction function; however, their interest rate response was not systematic and appeared mainly when the imbalances were extensive. The central banks raised interest rates in response to asset price and credit booms in the past, including the years preceding the global financial crisis. However, the interest rate response is visible mainly with the ex-post data and less evident with the pseudo-real-time data.


Česká Spořitelna


Patria Finance