| Recently, central banks expanded their balance sheets by unconventional actions, including credit easing operations. Although such quasi-fiscal operations are significant in size and assumed to be crucial for the economy's recovery, little theory is available to explain the possible macroeconomic consequences of these operations. The first chapter shows that quasi-fiscal shocks may affect inflation in plausible cases by utilizing a simple DSGE model that embraces the budgetary independence of the central banks. In the active quasi-fiscal policy regime, the shocks in the central bank's earnings alter the private agent's portfolio between consumption and the nominal money balance, thus affecting inflation. Conventional macroeconomic models have implicitly assumed policy regimes in which the aforementioned mechanism does not restrict equilibria; however, the first chapter shows that such assumptions generally are not guaranteed to hold. The extensions of the basic model show that quasi-fiscal shocks may produce undesirable effects, such as inflation following deflationary monetary policy during the implementation of exit strategy.;The second chapter extends the first chapter's framework to explore the aftermath of foreign reserve accumulations and the issuance of central banks' nominal bonds. When a central bank intervenes in the foreign exchange market and issues the nominal bonds in order to sterilize the intervention's impact on nominal money balance, the central bank's earning is exposed to real exchange rate shock and monetary policy shock. These shocks are examples of quasi-fiscal shocks that affect inflation in the active quasi-fiscal policy regime. The central bank can avoid the active quasi-fiscal policy regime by adjusting the premium paid to the bonds issued in order to stabilize its balance sheet. However, it is shown that adjusting the premium may introduce highly volatile inflation when the central bank bond outstanding is large.;The third chapter evaluates the efficacy of the sterilized foreign exchange rate intervention while mitigating the pervasive endogenous bias in the intervention literature. In an attempt to solve the endogeneity problems, this chapter utilizes customer trade data to identify the system of equations. By estimating the various model specifications, including the Markov-switching policy function, the results show that the interventions undertaken by the Bank of Korea were effective during 2001 and 2002. Specifically, the volatile market induced the Bank of Korea to intervene, and the interventions decreased the standard deviation of the changes in the Korean won rate from 5.683~5.793 to 5.676. |
