Essays on Unconventional Monetary Policy

Thesis

Monetary policy since the global financial crisis of 2007/08 has contended with the 'unknown unknowns' associated with Knightian uncertainty rather than the 'known unknowns' associated with risk. We find that when a policymaker knows neither the parameters of his model nor the probability distribution from which those parameters are drawn, more fear of model misspecification calls for more aggressive use of both conventional and unconventional instruments. Moreover, the greater the policymaker's doubts about the effect of asset purchases relative to the effect of interest rate changes, the greater the relative zeal with which he should pursue the former. Critics of the U.S. Federal Reserve argue that "unwarranted pessimism" about the effectiveness of quantitative easing (QE) inhibited the postcrisis monetary policy response. We find that this relative passivism during QE2 may instead have been the optimal response to less fear of model misspecification following QE1. Rather than the FOMC's return to activism during QE3 implying that its passivism during QE2 was undue, it may be the latter that was warranted and the former that was undue.

Authors: Paul, A

• DOI: 10.5287/ora-n6eakvgxn
• Type of award: DPhil
• Level of award: Doctoral
• Awarding institution: University of Oxford
• Language: English