Abstract:
Following the Global Financial Crisis of 2007 { 2010, central banks around the world were
forced into unprecedented policy interventions to stabilise asset markets and prevent the
global nancial system from collapsing. Because interest rates around the world were
at historical lows, \conventional" interest rate policy was not an option. Central banks,
led by the US Federal Reserve, resorted to \unconventional" monetary policies, rst
to stabilise markets during the height of the crisis, and then to support the economic
recovery thereafter. The distinguishing characteristic of these unconventional policies
was that they involved direct intervention by central banks in long-term xed income
markets, such as government bonds and agency debt.
This thesis considers the theoretical channels through which central bank purchases of
long-term securities could impact (i) bond yields, (ii) other domestic asset markets, and
(iii) spillovers to foreign countries. The theory is then tested and evaluated against
the empirical evidence. Based on the empirical results, a simple closed-economy DSGE
model is constructed. The model captures and illustrates the transmission from central
bank asset purchase shocks to the aggregate economy. The asset purchase shock
is subsequently converted to an endogenous balance sheet rule. Simulations show that
combining this unconventional (balance sheet) rule with a conventional (short-term interest
rate) rule yields a superior policy mix than under the conventional rule alone.
Finally, the closed-economy model is extended to an open-economy framework, within
which a similar balance sheet rule is evaluated in the context of international capital
ows. Again, the combination of the balance sheet and interest rate policy is found to
yield a superior outcome than interest rate policy alone.
The contribution of this thesis is twofold. It contributes to the understanding of the
impact of central bank interventions in xed income markets on long-term yields, as
well as the externalities and spillovers to other asset markets. Furthermore, this thesis
develops a robust and versatile framework, which is intuitively easy to grasp, within
which various aspects of central bank balance sheet policy could be investigated.
This thesis' main conclusion is that unconventional monetary policy could complement
conventional policy under normal market conditions, and that unconventional policy
need not be restricted to crisis times only.
