Macro-financial linkages and the role of unconventional monetary and macroprudential policy

Abstract

This thesis investigates the relationship between the macroeconomy and the financial sector. As shown by the Financial Crisis, large shocks in the financial system can have a significant impact on the real economy. In response, policy makers have adopted new and unprecedented tools to stabilise financial markets, e.g. unconventional monetary and macroprudential policies. The first chapter, joint with Fabio Canova, examines the international spillovers from unconventional monetary policy measures by the European Central Bank. We use a novel Bayesian mixed-frequency Structural Vector Autoregressive technique to show how unconventional monetary policy disturbances can generate important domestic and international fluctuations through real and financial channels. We find that international spillovers are larger in countries with more advanced financial systems and a larger share of domestic banks. The second chapter investigates the asymmetry of macro-financial linkages. Using a Markov- Switching Vector Autoregressive model, I show that financial booms tend to be less procyclical than financial busts. To identify the sources of asymmetry, I estimate a non-linear DSGE model with a heterogeneous banking sector and an occasionally binding borrowing constraint. The model shows that the borrowers’ balance sheet channel accounts for the asymmetry in macro-financial linkages. I show that a counter-cyclical macroprudential policy rule can improve welfare. The third chapter, joint with Julieta Yung, looks at financial stability and the term risk premium. We develop a dynamic stochastic general equilibrium framework that can account for macroeconomic and financial moments, given (i) Epstein-Zin preferences, (ii) a heterogeneous banking sector, and (iii) third-order approximation methods that yield a time-varying term premium. We find that a risk shock leads to a decrease in output and bank lending. Moreover, an accomodative monetary policy shock leads to a trade-off between output growth and financial stability. Our framework suggests that macroprudential policies can enhance financial stability.