Essays on Conventional and Unconventional Monetary Policies

Abstract

On one hand, this thesis contributes to the emerging literature on monetary policy for oil exporting countries by identifying new transmission channels and assessing the welfare and macroeconomic impacts of monetary targeting objectives. On another hand, it contributes to the new literature on heterogeneous agent models for policy analysis. Therefore, this thesis is split into two; the first part develops a DSGE model to assess oil price shocks and to determine welfare optimising policy responses for low- and middle-income net exporters of oil. While the second part, utilises heterogeneous agent and two-agent new Keynesian (HANK and TANK) models to assess the impact Large Scale Asset Purchases (LSAPs) have on the economy and inequality. The results show that firstly, output gap targeting is welfare improving under declining oil prices, but inflation targeting is welfare improving under increasing oil prices. Secondly, foreign bias in the home consumption basket induces different transmission channels for net exporters of oil. Thirdly, oil price fluctuation transmits differently to the exchange rate and terms of trade, which plays a crucial role in the occurrence of the Dutch disease. Fourth, given financial frictions, the capital access channel dominates the propagation of shocks. While the borrowing constraints induce different input demand dynamics for oil firms which constricts the magnitude effects of negative oil price shocks but expands positive effects. Fifth, the results from HANK and TANK show a positive but short-lived impact of asset purchases on the economy. It reveals a different transmission channel to consumption – transfers and wages. While portfolio rebalancing occurs, aggregate consumption is driven by transfers and wages. This explains the modest impacts of LSAPs within the literature as transfers have smaller fiscal multipliers. Sixth, the transfers and wages transmission channel underpin the decrease in consumption inequality and growth in income inequality respectively, while labour supply decisions and portfolio reallocation underpin the increase in illiquid wealth inequality.