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Title: Essays in monetary economics
Author: Qureshi, Irfan
ISNI:       0000 0004 6350 8768
Awarding Body: University of Warwick
Current Institution: University of Warwick
Date of Award: 2016
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This dissertation examines the conduct of monetary policy, by focusing on the causes and consequences of time-varying monetary policy. In chapter 1, I study whether money growth targeting leads to indeterminacy in the price level. I extend a conventional framework and show that the price level may be indeterminate if the central bank’s response to money growth is weak even when the Taylor principle is satisfied. Based on this reasoning, policy coefficients estimated using novel Federal Open Market Committee (FOMC) meeting-level data propose a new channel of the policy mistakes that may have triggered indeterminacy during the Great Inflation. Furthermore, I show that ‘passively’ pursuing money growth objectives generates significantly larger welfare losses compared to alternative specifications of the monetary policy rule but ‘active’ money growth targeting drastically minimizes welfare loss. I confirm the relationship between pursuing money growth objectives and macroeconomic volatility using cross-country evidence. In chapter 2, I decompose deviations of the Federal funds rate from a Taylor type monetary policy rule into exogenous monetary policy shocks and a time-varying inflation target. I show that the role of exogenous shocks may be exaggerated in a fixed inflation target model, and a large fraction of business cycle fluctuations attributed to them may actually be due to changes in the inflation target. A time-varying inflation target explains approximately half of the volatility normally attributed to these deviations, and consequently more than a quarter of the fluctuations in the business cycle. This contributes approximately 39% additional inflation volatility during the Great Inflation. I show that shocks to the inflation target imply a lower sacrifice ratio compared to exogenous changes in the interest rate and therefore propose a gradual adjustment of the inflation target in order to achieve monetary policy objectives. Chapter 3 presents an overview of the literature on the conduct of monetary policy. First, I summarize the design of monetary policy by differentiating between the goals, targets and instruments of monetary policy. Second, I focus on the role of policy rules as a basis for the setting of the Federal Funds rate in the U.S., and analyse the merits of including other objectives in the baseline policy rule. I study the welfare impact of these objectives in light of their historical macroeconomic performance documented in the literature. I also evaluate alternative policy rules such as constant money growth rules and nominal GDP targeting frameworks. Last, I study the classic rules versus discretion debate in light of the time-varying nature of monetary policy. The dissertation is presented in the following order: chapter 1 presents the paper titled ‘Monetarism, indeterminacy and the Great Inflation’. Chapter 2 presents the paper titled ‘What are monetary policy shocks?’, and chapter 3 presents a review of the literature on the conduct of monetary policy.
Supervisor: Not available Sponsor: Department of Economics ; University of Warwick
Qualification Name: Thesis (Ph.D.) Qualification Level: Doctoral
EThOS ID:  DOI: Not available
Keywords: HB Economic Theory