Book Description

This dissertation is a collection of three essays focusing on how to measure unconventional monetary policy and how unconventional monetary policy and the zero-lower-bound (ZLB) environment affect the macroeconomy and exchange rates. Chapter 1 shows that the widely used shadow rate is not a sufficiently informative measure of unconventional monetary policy. To better trace out monetary policy innovations and measure the corresponding macroeconomic impact, I develop a new econometric model which not only uses the shadow rate, but also employs forward guidance information contained in survey data on expected lift-off dates. After controlling for expectations about lift-off, I find post-crisis expansionary monetary policy is much more aggressive and effective than that estimated by a standard FAVAR model (Wu and Xia (2016)). Chapter 2 examines the performance of popular exchange rate forecast models against the random walk benchmark. The models are estimated in error correction and first-difference specifications, and evaluated at various forecast horizons (1 quarter, 4 quarters, 20 quarters) using differing metrics (mean squared error, direction of change, and "consistency" test). No model consistently outperforms a random walk, by a mean squared error measure, although purchasing power parity does fairly well. Moreover, along a direction-of-change dimension, certain structural models do outperform a random walk with statistical significance. While one finds that these forecasts are cointegrated with the actual values of exchange rates, the elasticity is usually different from unity. Overall, model/specification/currency combinations that work well in one period will not necessarily work well in another period. Chapter 3 converts unconventional monetary policy measures into equivalent conventional monetary policy measures --- federal funds rate surprises and expected inflation surprises --- and compares the effects of unconventional and conventional monetary policy announcements on the value of the dollar through these two channels. I find that the impact of the federal funds rate surprises on the dollar value has not changed much since the crisis began, but this channel has become irrelevant because the ZLB has eliminated all federal funds rate surprises. The impact of the expected inflation surprises, however, has weakened dramatically compared to the pre-crisis period.