Essays on Monetary Policy and Asset Markets

Abstract: This thesis consists of three essays on monetary policy and asset markets.“Monetary Policy Regimes and the Volatility of Long-Term Interest Rates” addresses two questions that have been studied separately in the literature. First, the paper aims at explaining the high volatility of long-term interest rates observed in the data. Building a small-scale macroeconomic model and estimating it on U.S. (and U.K.) data, I show that the policy responses of a central bank that is uncertain about the natural rate of unemployment can explain this volatility puzzle. Second, the paper aims at shedding new light on the distinction between rules and discretion in monetary policy. My empirical results show that using yield curve data may facilitate the empirical discrimination between different monetary policy regimes.“Do Central Banks React to House Prices?”, a joint essay with Daria Finocchiaro, asks whether the U.S. Fed, the Bank of Japan and the Bank of England have reacted to house price inflation. We study the responses of these central banks by estimating a structural model for each country where credit constrained agents borrow using real estate as collateral. The main result is that house price movements did play a separate role in the U.K. and Japanese central bank reaction functions in the last years, while they did not in the U.S.“How Important are Financial Frictions in the U.S. and the Euro Area?” aims at evaluating whether frictions in credit markets are important for business cycles in the U.S. and the Euro area. For this purpose, I modify the financial accelerator model developed by Bernanke, Gertler and Gilchrist (1999) and estimate it with Bayesian methods. I find that financial frictions are relevant in both areas. According to posterior odds ratios, the data clearly favors the model with financial frictions both in the U.S. and the Euro area. Moreover, consistent with common perceptions, financial frictions are larger in the Euro area.