Three Essays on Unconventional Monetary Policy at the Zero Lower Bound

• Chapter 1: Impact of Quantitative Easing at the Zero Lower Bound (with J. Dorich, R. Mendes).;• Chapter 2: Impact of Forward Guidance at the Zero Lower Bound.;This chapter addresses the use of conditional statement at the zero lower bound, along with other forms of policy guidance. I consider alternative monetary policy rules under commitment in a calibrated three-equation New Keynesian model and examine the extent to which forward guidance helps to mitigate the negative real impact of the zero lower bound (generated by a negative demand shock). The simulation results suggest that the conditional statement policy prolongs the zero lower bound duration for an additional 4 quarters and reverses half of the decline in inflation associated with the lower bound. It even generates a period of overshooting in nation three quarters after the initial negative demand shock. Alternatively, the effect of price-level targeting as a forward guidance policy at the zero lower bound is slightly different. It shortens the zero lower bound duration by one quarter, but generates the highest inflation profile among the alternative policy rules considered.;• Chapter 3: Impact of Quantitative Easing on Household Deleveraging.;We introduce imperfect asset substitution and segmented asset markets, along the lines of Andres et al. (2004), in an otherwise standard small open-economy model with nominal rigidities. We estimate the model using Canadian data. We use the model to provide a quantitative assessment of the macroeconomic impact of quantitative easing (QE) when the policy rate is at its effective lower bound. Our results suggest that a QE intervention of 4 per cent of GDP for 4 quarters has moderate impact on interest rates but small impact on output. More specifically, when the nominal short-term interest rate is constrained at the lower bound, following a decline of 10bps in the long-term bond yield through QE, we find a small impact on aggregate demand (real level of GDP increases by 0.06%, similar to the findings of Baumeister and Benati 2010) and a much larger impact on inflation (0.1%). The timing of the monetary stimulus, however, is much faster, with peak responses on output and inflation occurring after 4 and 3 quarters, respectively.;I extend the DSGE model in the first chapter that features imperfect asset substitutability, segmented asset market with some financial frictions to match the great ratios and dynamics in the Canadian economy. I simulate the model to explore the effects of quantitative easing on asset prices, household balance sheet. There are two effects of QE on aggregate output originated from the model. First, QE leads to a decline in term premium, which increases current consumption relative to future consumption. Second, it creates a more favorable financing conditions for borrowers through an improvement in the household balance sheets arising from higher net worth. This leads to a lower loan to collateral value ratio and a decline in external finance premium. Favorable financing condition encourages further accumulation of household debt at cheaper rates, in turn, leads to an immediate higher household debt to income ratio. The effect of QE beyond the initial impact would depend on the elasticity of loan demand to the policy. If the increase in loan is greater than the increase in the overall collateral value, this would lead to an ultimate deeper leverage and therefore higher default rate. In the consideration of the future withdrawal of any stimulus provided from QE, this would pose greater challenges as it implies much intensive household deleveraging process. I provide some sensitivity analysis around key parameters of the model.