Browsing by Subject "Geldpolitik"

Now showing 1 - 17 of 17

A behavioral macroeconomic model with endogenous boom-bust cycles and leverage dynamcis
(2011) Scheffknecht, Lukas; Geiger, Felix
We merge a financial market model with leverage-constrained, heterogeneous agents with a reduced-form version of the New-Keynesian standard model. Agents in both submodels are assumed to be boundedly rational. The financial market model produces endogenously arising boom-bust cycles. It is also capable to generate highly non-linear deleveraging processes, fire sales and ultimately a default scenario. Asset price booms are triggered via self-fulfilling prophecies. Asset price busts are induced by agents' choice of an increasingly fragile balance sheet structure during good times. Their vulnerability is inevitably revealed by small, randomly occurring shocks. Our transmission channel of financial market activity to the real sector embraces a recent strand of literature shedding light on the link between the active balance sheet management of financial market participants, the induced procyclical fluctuations of desired risk compensations and their final impact on the real economy. We show that a systematic central bank reaction on financial market developments dampens macroeconomic volatility considerably. Furthermore, restricting leverage in a countercyclical fashion limits the magnitude of financial cycles and hence their impact on the real economy.
A monetary-fiscal theory of prices in modern DSGE models
(2018) Schröder, Christian Philipp; Spahn, Peter
Starting with the Eurozone crisis in 2010, fiscal variables such as the government budget position and public debt of certain member countries as well as the design of the European Monetary Union as a whole came under close scrutiny again. Furthermore, as a consequence of the global financial crisis, the economic profession faced accusations that, using the established ‘workhorse models,’ it was not able to provide answers to the pertinent questions of the time. From the perspective of economic theory, two main issues can be outlined against this background: (1) How do the so-called DSGE (dynamic stochastic general-equilibrium) models work which form a quasi-consensus in practice, research, and teaching nowadays? This relates especially to determinacy, that is, the mathematical property of being able to draw unique conclusions from a given set of assumptions. (2) What roles do the main fields of macroeconomic policy---fiscal and monetary policy---play in this? The exposition of these items is carried out within a formally consistent theoretical model which adheres to common standards and strikes a balance between staying general enough for a broad range of approaches and being sufficiently specific to yield tangible results. Following a brief introduction, Chapter 2 presents a microfounded (‘baseline’) general-equilibrium model that acts as a foundation for subsequent analysis. The only substantial exception is the excursus in Chapter 3. It deals with interactions between the entities of the consolidated government sector, namely the treasury and the central bank, and in doing so also touches on traditional models which cannot be reconciled entirely with modern theory. One of the main aspects is the “unpleasant monetarist arithmetic” that describes the long-standing explanation for fiscally induced inflation. The fourth chapter then takes up the baseline model and ‘closes’ it by defining monetary as well as fiscal policy, both of which can be active (that is, dominant) or passive. Resulting from this classification are two stable macroeconomic regimes (monetary or fiscal dominance) plus two undesirable outcomes (explosive instability or indeterminacy of central model variables). Monetary dominance is tantamount to the prevailing world view—central banks can independently pursue a measure of price stability while governments have to follow a sustainable (Ricardian) fiscal policy—whereas fiscal dominance gives rise to a “fiscal theory of the price level” in which the treasury sets budget surpluses without regard for other variables and monetary policy can be an implicit accomplice at most. This latter regime ultimately puts price stability into the hands of the treasury. Initially, the only public liability is debt (there is no money at this stage); however, the is model is able to determine unique price levels in the stable regimes. Chapter 5 introduces several isolated complications to the model described so far. One is the role of money, especially in the fiscalist model variant; it shows that the main results remain unchanged if monetary policy is conducted via money-supply instead of interest-rate policy. Further considerations are the zero lower bound on interest rates (in a graphic analysis) as well as limits to public-sector liabilities. Subsequently, Chapter 6 applies the baseline model of Chapter 2 to the open economy—more precisely, a monetary union consisting of two countries. Since monetary policy is supranational here, outcomes crucially depend on national fiscal policies. While the baseline model assumes flexible prices, Chapter 7 adds the considerable complication of nominally rigid prices. A mostly ‘plain-vanilla’ New-Keynesian model emerges which, following common practice, is then linearized and simulated in Matlab/Dynare. At the core of the analysis lie the two stable regimes carved out in Chapter 4. The central implications of the monetary-fiscal theory derived so far are adjusted gradually, but remain in place generally. Towards the end, the thesis highlights empirical issues (verifiability of the regimes, historical case studies). Finally, the results obtained beforehand culminate in a comprehensive discussion of the monetary-fiscal theory, including a distinction from traditional approaches. Chapter 10 concludes.
Assessing uncertainty in Europe and the US : is there a common factor?
(2012) Sauter, Oliver
This paper aims an empirical investigation of uncertainty in the Euro Zone as well as the US. For this purpose I conduct a factor analysis of uncertainty measures starting in 2001 until the end of 2011. I use survey-based data provided by the ECB and the Federal Reserve Bank of Philadelphia as well as the stock market indices VSTOXX and VIX, both measures of implied volatility of stock market movements. Each measure shows an increase in uncertainty during the last years marked by the financial turmoil. Given the rise in uncertainty, the question arises whether this uncertainty is driven by the same underlying factors. For the Euro Zone, I show that uncertainty can be separated into factors of short and long-term uncertainty. In the US there is a sharp distinction between uncertainty that drives stock market and ?real? variables on the one hand and inflation (short and long-term) on the other hand. Combining both data sets, factor analysis delivers (1) an international stock market factor, (2) a common European uncertainty factor and (3) an US-inflation uncertainty factor.
Deflationary vs. inflationary expectations : a new-Keynesian perspective with heterogeneous agents and monetary believes
(2009) Sauter, Oliver; Geiger, Felix
We expand a standard New-Keynesian model by allowing for a special role of money in the inflation and expectations building process. Motivated by the two-pillar Phillips curve, we introduce heterogeneous expectations. Thereby a fraction of agents forms inflation expectations by observing trend money growth. We show that in the presence of these monetary believers, contractive shocks to the economy produce smoother dynamics for inflation and output. We also find that monetary policy should follow a conventional Taylor rule with contemporaneous inflation and output data, if it is uncertain about the fraction of monetary believers.
How the ECB and the US fed set interest rates
(2006) Polleit, Thorsten; Belke, Ansgar
Monetary policies of the ECB and US Fed can be characterised by ?Taylor rules?, that is both central banks seem to be setting rates by taking into account the ?output gap? and inflation. We also set up and tested Taylor rules which incorporate money growth and the euro-dollar exchange rate, thereby improving the ?fit? between actual and Taylor rule based rates. In general, Taylor rules appear to be a much better way of describing Fed policy than ECB policy. Simulations suggest that the ECB?s short-term interest rates have been at a much lower level in the last two years compared with what a Taylor rule would suggest.
Instability of the Eurozone? : on monetary policy, house prices and structural reforms
(2006) Belke, Ansgar; Gros, Daniel
This paper deals with potential instabilities of the eurozone stemming from an insufficien interplay between monetary policy and reform effort on the one hand and the emergence of intra-euro area divergences on the other. As a first step, we assess the effect of EMU on structural reform and investigate this question by an examination of the relationship between fixed exchange rates and reform in two wider samples of countries. We also stress that loose monetary conditions which prevailed until some months ago can also manifest themselves in asset price inflation, notably in the housing market. When these bubbles burst, for example, when housing prices stop rising, this often leads to a prolonged period of economic instability and weakness rather than consumer price inflation. As a second step, we point out that risks for EMU are not only increasing because longer-term disequilibria become evident in fiscal and monetary policy, but also because serious divergences are now appearing within the euro area which threaten its long-term cohesiveness. The most manifest example of this threat comes from what promises to be a long-term divergence between Germany and Italy which for the time being was offset by asynchronous developments of house prices in both countries. There are still large differences within the euro area, with the small countries performing much better than the large ones on almost every indicator. This suggests that better policies can make a large difference even if monetary policy is the same for everybody. Finally, we construct a simple formal model in order to investigate whether EMU is in danger from internal tensions which could lead to severe instabilities. The experience so far has shown that some countries are continuously losing competitiveness. Is this a structural problem in the sense that these countries just have problems in keeping inflation at level that does not imply a continuing loss of competitiveness? Or is the persistence of higher inflation one can observe in some countries due to the internal dynamics of a monetary union in which any country that starts with higher inflation rate also has a lower real interest rate, which stimulates demand, and thus leads potentially to even more inflation. The purpose of our theoretical section is to discuss what the main factors are which could lead to such diverging cycles.
Interest rate policy and supply-side adjustment dynamics
(2010) Schmid, Kai Daniel; Kienzler, Daniel
In contrast to the present consensus view of stabilization policy, theoretical and empirical research strongly support the consideration of supply-side adjustment to pronounced variations of factor-utilization in order to trace a more realistic pattern of macroeconomic adjustment dynamics within simulation studies. Against this background, our paper seeks to illuminate the relevance of endogenous supply-side adjustment for monetary policy research. We modify a basic New Keynesian model by explicitly considering demand-side stimulus on the evolution of productive capacity and analyze stability, impulse response, and welfare issues if the central bank follows a simple monetary policy rule. Thereby, we control for the robustness of our policy implications by various states of output gap mismeasurement the central bank might be confronted with. We find that, in contrast to a basic New Keynesian Model, output gap stabilization plays a more prominent role when potential output is endogenous.
International digital currencies and their impact on monetary policy : an exploration of implications and vulnerability
(2019) Proettel, Thorsten
The objective of this discussion paper is to explore the consequences for monetary policy from the establishment of an international digital currency modeled like Libra. For this purpose, a basic assessment of the behavior of economic agents is conducted and possible conflicts with monetary policy are analyzed. Furthermore, a simple approach is developed to estimate the nature and extent of vulnerability for 42 currencies. The results suggest that currencies from developing countries and from developed nations are vulnerable in different ways. In the end, a stronger convergence of central bank policies could result. Thus, the introduction of an international digital currency represents a turning point for monetary policy.
Langfristige Neutralität der Geldpolitik?
(2010) Schmid, Kai Daniel; Spahn, Peter
Macroeconomic theory often strictly separates cyclical analysis from trend analysis. Whereas the former is identified as the short-run phenomenon of a varying capacity utilization, the latter is understood as the long-run problem of economic growth that predominantly focuses on the evolution of basic growth factors, such as the supply of labour and technical progress, and disregards problems of macroeconomic stability. In particular, the consequences of monetary policy actions are modeled nonneutral in the short run but neutral in the long run. Policy implications of the present consensus view of stabilization policy depend on specific assumptions with regard to the equilibrium level of production. Thereby, the interpretation of equilibrium output rests on a separation of supply-side and demand-side adjustment to macroeconomic shocks promoting a dichotomy of short-term and long-term macrodynamics. For the present consensus model of macroeconomic stabilization policy this dichotomy represents one of the basic conceptual features. As non-neutrality is limited to the short run - interest rate policy affects aggregate demand and enables the central bank to target inflation - the system does not face a trade-off between real and nominal variables in the long run. The possibility that monetary policy actions may induce real effects that exceed short-term dynamics has been rarely discussed in mainstream economic literature and consequently has gained little attention in the discussion of monetary policy?s stabilization strategies. However, such a strict separation between short-term (generally associated with demand-side) and long-term (supply-side) macrodynamics not only provokes concern from the stance of basic insights of the theories of economic growth. Rather one has to argue that significant changes of capacity utilization that last over several periods may induce procyclical supply-side adjustments. For this reason, several economists raise severe concerns with regard to the corresponding model-setups described above. In fact, the (over-)simplification of an extensively exogenous evolution of productive capacity on the one hand and the mechanisms of procyclical adjustment of production factors on the other hand reveal a strong macrotheoretical tension. There are several channels that promote procyclical stimulus of aggregate demand and a changing factor utilization to the accumulation and efficiency of an economy?s productive capacity. Changing investment dynamics not only lead to quantitative adjustments of the capital stock, but also stimulate multifactor productivity through technical progress. Moreover, unemployment may forward the emergence of long-term unemployment and reduce the effective supply of labor by mechanisms of labor market hysteresis. This clearly weakens the conventional agreement of a trend-cycle-dichotomy which still plays a central role within the context of models that are used for stabilization analysis. Moreover, the theoretical considerations are supported by empirical findings that provide strong clues for procyclical evolution of productive capacity. Against the background of asymmetric factor utilization due to nominal divergence and the resulting differences in real interest rates EMU-members reflect clear differences with regard to the utilization and accumulation of production factors. As alternating stimuli of aggregate demand and supply support the view that the long-term development of an economy cannot be understood without its short-term outcomes, stabilization policy that is supposed to be nonneutral in the short run will exhibit long-term effects with regard to output and employment. The impact of a changing factor utilization on the accumulation and efficiency of production factors motivates path dependency and the existence of multiple equilibria. As cyclical movements of aggregate demand play a decisive role for the evolution of an economy?s productive capacity stability and uniqueness of long-term equlibria as a system?s point of return become uncertain. In particular, output gaps close not only via the shift of aggregate demand but also due to the procyclical adjustment of potential output. Although there seem to be strong arguments in favor of procyclical adjustment of potential capacity to variations in aggregate demand, monetary policy may not frivolously exploit supply?s elasticity for expansionary stimulus. This is not only due to the fact that supply-side adjustment limits itself to certain ranges but also the evolution of inflation expectations may reduce the reflationary scope. On the other hand, the long-term costs of pronounced underutilization highlight the asymmetric quality of stabilization impulses that seem to be disregarded within ordinary loss functions.
Macroeconomic stabilisation and bank lending : a simple workhorse model
(2013) Spahn, Peter
A hybrid standard macro model is supplemented by an explicit analysis of bank lending, based on a five-position aggregative balance sheet. In the model's two versions credit supply is based on a leverage targeting rule or on simple optimisation, taking into account lending risks and funding costs. Model simulations explore consequences of supply and demand disturbances, discretionary interest rate moves, asset valuation and credit risk shocks. Besides standard Taylor policies, the paper compares the relative efficiency of additional stabilisation tools like external-funding taxes and anti-cyclical leverage regulation. Quantitative restrictions for bank activities seem to be useful.
Medium-run macrodynamics and the consensus view of stabilization policy
(2010) Schmid, Kai Daniel
Policy implications of the present consensus view of stabilization policy depend on specific assumptions with regard to the equilibrium level of production. Thereby, the interpretation of equilibrium output rests on a separation of supply-side and demandside adjustment to macroeconomic shocks promoting a dichotomy of short-term and long-term macrodynamics. In contrast to this, there are several channels that promote procyclical stimulus of aggregate demand and a changing factor utilization to the accumulation and efficiency of an economy?s productive capacity. Medium-run macrodynamics call for a rather endogenous explanation of production capacity and challenge the uniqueness of long-term equilibria.
Monetary policy and systemic risk on financial markets : concepts, transmission channels and policy implications
(2016) Scheffknecht, Lukas; Spahn, Peter
The present thesis explores the issue of systemic risk on financial markets and its interplay with monetary policy. Systemic risk is defined as the risk of experiencing a severe financial crisis. It is inefficiently high in the absence of appropriate regulation due to the presence of systemic externalities, which arise if financial institutions do not internalize the consequences of their actions for systemic stability. More specifically, such behavior may lead to vulnerable financial networks, poor diversification, fire sales, inefficient distribution of liquidity as well as to breakdowns of markets characterized by incomplete information. Macroprudential regulation aiming at systemic stability should therefore focus on the mitigation of systemic externalities. However, a critical assessment of the current state of financial regulation reveals that several important drivers of systemic risk remain unaddressed. Insufficient containment of systemic risk poses a challenge for monetary policy. First, financial crises have adverse effects on macroeconomic stability. Second, monetary policy itself has the potential to affect the evolution of systemic risk. It is subsequently tried to shed light on potential transmission channels running from an expansive policy stance to an increase in systemic risk. On a theoretical basis, it is found that a monetary expansion tends to induce higher leverage as well as credit risk and less stable refinancing in the intermediation sector. An empirical analysis of the US economy based on vector autoregressions supports this “risk-taking channel.” Moreover, the analysis of a simple macro-financial model shows that procyclical risk-taking behavior of financial intermediaries produces additional macroeconomic volatility. Optimal policy consists of a combination of strict capital requirements and an interest rate rule featuring an explicit reaction to credit dynamics. In a final step, I discuss implications for monetary policy. If macroprudential regulation is not strict enough, it is advisable to embark on a strategy of preemptive interest rate hikes in an environment of rising systemic risk. Its implementation could be achieved by a slight modification of the existing two-pillar strategy of the European Central Bank. Alternatively, central banks could rely on output gap measures which take financial conditions into account. However, such a strategy can increase short-term macroeconomic volatility. Hence, monetary policy faces the additional trade-off of balancing medium-term financial stability against macroeconomic stability in the short run. Moreover, monetary policy and macroprudential regulation should be carefully coordinated to deliver welfare-maximizing outcomes.
Money and inflation : lessons from the US for ECB monetary policy
(2007) Polleit, Thorsten; Belke, Ansgar
We turn our attention to the role of money for determining nominal magnitudes. Using US data, we find that the aggregate ?nominal output plus and stock market capitalisation? is closely related to the money stock, lending support to one of Milton Friedman?s key monetarist propositions. This finding should be particularly important for ECB monetary policy: an inflation-free euro plays a crucial role for European economic and political integration. We conclude that monetary policy must keep a very close eye on money supply if it wants to prevent consumer and asset price inflation.
Money matters for inflation in the euro area
(2006) Polleit, Thorsten; Belke, Ansgar; Kösters, Wim; Leschke, Martin
PART 1 ECB independence and price stability The success of the stability oriented monetary policy of the ECB depends on the acceptance of the bank?s institutional set-up. In this context, the ECB?s political independence seems to be of the utmost importance. However, important pillars for safeguarding the bank?s political independence ? such as, for instance, governments? adherence to the European Stability and Growth Pact and the acceptance of the division of labor between fiscal and monetary policy ? induced) financial crisis which, in turn, could have a highly negative impact on output and employment. PART 2 Monetary policy and structural reforms What role does monetary policy play for structural reform in open economies? Empirical estimations were performed with panel data for 23 OECD countries from 1970 to 2000. Structural reform was measured by the Economic Freedom of the World index, whereas the monetary policy constraints were measured by a monetary commitment index and the prevailing exchange rate regime. ? Our results provide little evidence for the hypothesis that a discretionary monetary policy promotes structural reform and economic freedom. The results strongly argue against those views maintaining that a business cycle oriented and lax monetary policy has never and nowhere been detrimental for employment. In fact, our results show that discretionary monetary policies tend to lead to a lower degree of structural labor market reform and, hence, to lower employment. That said, the ECB should pursue a medium- to long-term oriented monetary policy if it wants to strengthen growth and employment in the euro area via supporting reforms. PART 3 A critical view of the real interest rate concept The concept of the neutral (real) interest rate (NRIR) ? as implied by the Taylor rule ? recommends monetary policy to set real interest rates at a level that closes, or at least smoothes, the output gap. We argue that such a policy, if put into practice, would entail substantial pitfalls. First, monetary policy is an inadequate tool for influencing real GDP: the central bank?s impact on long-term interest rates and GDP is actually small (or not existing); to make things worse, a cyclically oriented policy would provoke the well-known time-lag problem. Second, and perhaps most importantly, the NRIR concept is not necessarily compatible with price stability, as it ignores the impact of credit and money growth on inflation. ? As a result, we are in favour of a long-term oriented monetary policy that has a strong focus on money and credit growth and asset prices. Such a monetary policy would not only be compatible with the objective of price stability. It would also reduce the risk of the economy falling into (a monetary induced) financial crisis which, in turn, could have a highly negative impact on output and employment. PART 4 ECB monetary policy and euro inflation outlook Even at a main refinancing rate of 3.25%, ECB monetary policy remains very expansionary. We forecast annual HICP inflation in 2007 to be 2.3% on average (including the German VAT hike). Due to strong excess liquidity, annual consumer price inflation is likely to remain at 2.3% in 2008. We recommend raising ECB rates further to around 4.0%, for reducing credit and money supply growth, thereby dampening inflationary pressure. ? Our money demand analyses for the euro area suggest that, in recent years, excess liquidity might have been translating in great part into asset price inflation rather than consumer price inflation. The results indicate that headline M3 growth is actually much more closely related to the ongoing loss of purchasing of money power of the euro ? that is consumer and asset price inflation ? than may be widely believed. That said, for keeping inflation in check it seems advisable for the ECB to set interest rates in line with the signals provided by (trend) money supply (excess liquidity).
Realzins, intertemporale Preise und makroökonomische Stabilisierung : ein Streifzug durch die Theoriegeschichte
(2007) Spahn, Heinz-Peter
The notion of a "real rate of interest" has been a centre of confusion in the history of economic thought. In neoclassical economics, real interest rates were designed as relative prices of contemporary and future goods and Böhm-Bawerk believed that misalignments were corrected by market forces, restoring the allocation of saving and investment as well as macroeconomic equilibrium. The intertemporal perspective in goods market analysis was modified in Wicksell and Keynes; the focus shifted to financial markets. According to the new Keynesian theory, monetary policy should be used to support intertemporal consumption smoothing. Because investment is neglected, this approach is unable to grasp the intertemporal coordination problem and delivers poor microfoundations for macroeconomic stabilization.
Taylor-Regel und amerikanische Geldpolitik
(2001) Hartmann, Daniel
Anfang der 90er Jahre war es dem Ökonom John B. Taylor, der bis vor kurzem an der Stanford University gelehrt hat, inzwischen aber von George Bush ins Finanzministerium berufen wurde, ein großes Anliegen, daß die Idee einer geldpolitischen Regelbindung Eingang in die Notenbankpraxis findet. Durch ein systematisches, an einer Regel orientiertes Vorgehen, könnte seiner Ansicht nach insbesondere die amerikanische Geldpolitik verbessert werden. Es bestand zur damaligen Zeit jedoch eine große Diskrepanz zwischen der geldpolitischen Forschung, die sich mit sehr komplexen Regeln beschäftigte und der geldpolitischen Praxis, die wenig Interesse an einer Regelbindung zeigte. Diese Vorbehalten unter Notenbankern wollte Taylor durch die Formulierung einer besonders einfachen Regel, die aber dennoch gute geldpolitische Ergebnisse liefert, überwinden. Es hat sich dann herausgestellt, daß die nach ihm benannte Taylor-Regel nicht nur verblüffend einfach ist, sondern auch die tatsächliche Geldpolitik der Federal Reserve seit 1987 gut abbildet. Dies verhalf der Regel zu weiterer Popularität, da die Geldpolitik dieser Periode als besonders erfolgreich gilt. Diese Arbeit beschäftigt sich in den ersten fünf Kapiteln ausführlich mit verschiedenen Aspekten der Taylor-Regel. Thematisiert werden die wichtigsten Merkmale und Eigenschaften der Regel (Kapitel 2 und 3). Es wird den Fragen nachgegangen, wie die Regel in der geldpolitischen Praxis implementiert werden kann (Kapitel 3), wie Taylor die einzelnen Komponenten seiner Regel theoretisch abgeleitet und gerechtfertigt hat (Kapitel 4) und welche kritischen Einwände gegenüber der Regel bestehen (Kapitel 5). Der erste Teil schließt mit einer Abgrenzung zu anderen, aktuell diskutierten geldpolitischen Strategien (Inflation Targeting und Geldmengensteuerung, Kapitel 6). Im letzten Kapitel ? dem zweiten Teil der Arbeit ? wird untersucht, welche Rolle die Taylor-Regel in der amerikanischen Geldpolitik spielt. Es gilt zu klären, wie sich die Nähe der amerikanischen Geldpolitik zur Taylor-Regel erklären läßt (Kapitel 7.1), welche Komponenten der Regel zum Erfolg der amerikanischen Geldpolitik beigetragen haben (Kapitel 7.2) und was die Federal Reserve davon abhält, sich offiziell an die Regel zu binden (Kapitel 7.3).
Unconventional monetary policy : theoretical foundations, transmission mechanisms and policy implications
(2018) Schmidt, Benjamin; Spahn, Peter
The financial crisis of 2007-09 can be divided into a ’pre-Lehman’ and a ’post-Lehman’ episode. The ’pre-Lehman’ episode lasted from August 2007 to September 2008 and was largely confined to distressed European and US money markets. In comparison, the ’post-Lehman’ episode was characterized by a global economic slump, deflationary risks, and policy rates at the effective lower bound in most advanced and many emerging economies. Accordingly, part I of this thesis starts with the monetary policy Response to the ’pre-Lehman’ turmoil on interbank markets, while part II addresses unconventional monetary policies at the zero lower bound. Finally, part III provides a theoretical and empirical assessment of their macroeconomic consequences. Beyond that, it also includes a short discussion on potential exit strategies from unconventional monetary policies. Part I: After a preliminary discussion of the way monetary policy is implemented in normal times, chapter 2 presents a simple corridor model of the reserve market. Subsequently, this model is used to describe some crisis-driven innovations in monetary policy frameworks. The key result of this chapter is that by replacing large parts of the malfunctioning interbank market with central bank intermediation, the Fed and the ECB succeeded in preventing an ’adverse spiral’ that may have easily unfolded from the heightened uncertainty among money market participants. As monetary policy in the ’post-Lehman’ era increasingly turned towards lowering the term-premium component of longer-term rates, chapter 3 highlights that the precrisis workhorse model of monetary policy analysis – the baseline New Keynesian model (NKM) – is inappropriate to capture such effects. The reason is that the NKM assumes rational expectations, perfectly flexible financial markets, and the existence of the pure expectations theory of the term structure, which altogether offer the rationale for the Wallace neutrality of central bank open market operations (Wallace, 1981). Accordingly, the chapter ends with the conclusion that most standard dynamic stochastic General equilibrium models (DSGE) lack the conditions conducive for central bank asset purchases to have a direct effect on either nominal or real economic variables. Part II: The second part starts with a basic classification of unconventional monetary policies. Those are: (i) forward guidance, (ii) quantitative vs. qualitative easing, and, (iii)negative policy rates. In a next step, I construct a preferred-habitat model of the term structure, which provides the theoretical foundation for the portfolio balance channel of central bank asset purchases (see chapter 4.2.) Chapter 5 sheds further light on the transmission channels of unconventional policies. In this context, the predictions of economic theory are cross-checked with the empirical evidence for the US, the UK, and the euro area. Since the focus of this thesis lies on the euro area, in chapter 6, I follow Altavilla et al. (2015) and conduct an event study on the ECB’s asset purchase program (APP). In contrast to previous studies, I investigate the set of all official ECB announcements related to the APP over the period from 2014 to 2016. Moreover, I do not confine the analysis to sovereign and corporate bond yields and, thus, provide a more comprehensive perspective on the impact of QE in the euro area. Beyond bond yields, I assess the impact on the European stock markets, on inflation expectations, and on various euro exchange rates. Consistent with the credit risk augmented preferred-habitat theory of chapter 4.2, I find that the APP significantly reduced Italian and Spanish government bond yields, while the effects on German and French yields were much less pronounced. This points to a portfolio balance effect that runs primarily through country-specific risk premia. Beyond its impact on sovereign bonds, the APP also significantly lowered the yields on euro area corporate bonds (both financial and non-financial). While the announcements led to a significant depreciation of the euro against the US dollar, I do not observe a significant effect on expected inflation and interbank swap rates. Hence, the signaling channel and the Inflation reanchoring channel seem to be less important in the euro area than in the US (see e.g. Bauer and Rudebusch, 2014). Part III: Although the immediate impact on financial markets might be a necessary precondition for the effectiveness of unconventional monetary policy, its ultimate Goal is to stabilize inflation and stimulate economic activity. In turn, part III deals with the macroeconomic effects of central bank asset purchases. In this context, firstly, the Impact of QE on the banking system is addressed. By taking a closer look at the empirical evidence for the credit channel in the UK, the euro area and the US, I reach the conclusion that with the ongoing deterioration in bank capital and the persistent economic slump that followed the failure of Lehman Brothers, the positive impact of additional liquidity increasingly receded. Instead, in the ’post-Lehman’ era, any stimulating effect of monetary policy on bank lending acted mainly through the bank capital channel. Given the prevalence of the portfolio balance effect, chapter 8 provides a detailed discussion within a modern DSGE set-up. By drawing on earlier insights from the preferred-habitat theory, this chapter highlights the macroeconomic implications of market segmentation and limits to arbitrage for the effectiveness of central bank asset purchases. In chapter 8.4, I follow Harrison (2012) and extend the portfolio balance model by including financial intermediaries and the zero lower bound on the short-term policy rate. Thereby, I am able to explicitly account for two separate policy instruments at the disposal of the central bank: conventional interest rate policy and central bank Balance sheet operations. This enables me to simulate the impulse response functions of central bank asset purchases in case of a binding and non-binding zero lower bound. Consequently, the simulation exercise underlines the important result that asset purchases are particularly powerful in stabilizing the macroeconomy at the zero lower bound of the short-term policy rate. However, the DSGE simulations provide only a qualitative validation for the theoretical predictions about the portfolio balance effect. Therefore, in chapter 9, I conduct a meta study on the existing empirical evidence concerning the macroeconomic effectiveness of unconventional monetary policies in the US, the UK, and the euro area. And while there is a great dispersion among the individual estimates, it seems evident that the macroeconomic impact of the ECB’s asset purchase program was substantially smaller than those of the Federal Reserve and the Bank of England. Finally, chapter 10 outlines some broad principles with respect to exiting unconventional monetary policies. A key finding of this chapter is that a successful exit strategy should likely involve the following steps: first, forward guidance concerning the expected path of future interest rates; second, the application of temporary reserve drainage operations and/or reserve requirements; third, stopping the reinvestment of maturing assets on the central bank’s balance sheet and, ultimately, the use of asset sales. Furthermore, I argue that potential central bank losses should not pose a serious constraint on plausible exit scenarios. Chapter 11 concludes.