Essays on the effects of unconventional monetary policy in economies with frictions

In response to the financial crises of the 2000s, central banks implemented unconventional monetary policies (UMP) to restore liquidity and promote credit creation. This thesis investigates the effects of these policies, which involved using the composition and size of central bank balance sheets as instruments of policy. Specifically, this thesis examines the theoretical foundations and quantitative transmission mechanisms of UMP in scenarios where interest-rate-based monetary policy is constrained by the lower bound of the nominal policy rate.

The first two papers of this thesis present theoretical models of a three-period economy, where households, firms, and a consolidated government interact. In the context of a liquidity trap scenario and the presence of nominal rigidities, the first paper shows that UMP in the form of outright purchases of illiquid assets by the central bank have no real effects in a perfect risk-sharing environment but can provide partial insurance against idiosyncratic unemployment risk under imperfect risk-sharing. The second paper examines the effects of UMP when an uncertainty shock generates the liquidity trap scenario and shows that, in this context, UMP can improve welfare.

The third paper of the thesis provides a quantitative assessment of the effects of UMP. Using a dynamic model of a small open economy member of a monetary union, I show that UMP in the context of a negative shock to the price of sovereign bonds, has positive effects on output and unemployment. By combining theoretical and quantitative analyses, this thesis sheds light on the complex mechanisms through which central bank balance sheet policies affect the economy in different scenarios and provides insights for policymakers and researchers alike.