Studies on the role of asset prices and credit in the design of monetary and regulatory policy
deJuly 01, 2008
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About this Episode
The three chapters of this thesis look at the interaction of monetary and regulatory policy with financial markets. The first chapter analyses optimal monetary policy in the presence of liquidity constrained consumers, the proportion of which varies with house prices. In the second chapter, the hypothesis that expansionary monetary policy in response to a stock market crash might lead to excessive risk-taking by financial market participants is evaluated empirically. Finally, the last chapter provides a theoretical model to assess the impact of minimum bank capital requirements on the fluctuation of aggregate bank lending when banks hold different levels of capital over and above the required minimum.
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The present work contributes to the literature on uncertainty by using empirical methods to measure uncertainty and volatility, and empirical and theoretical methods to analyze two transmission channels through which uncertainty is linked to the business cycle. The first chapter looks into the problem of measuring inflation uncertainty and proposes to use common information contained in a variety of different uncertainty proxies. In the second chapter, we develop measures of firm-specific volatility and quantify the effect of heightened volatility on the price setting behavior of firms and analyze whether this link changes the effectiveness of monetary policy. The third chapter compares the effects of heightened idiosyncratic uncertainty on credit spreads in bank-based and market-based financial systems.