Date of Award

Spring 1-1-2019

Document Type

Dissertation

Degree Name

Doctor of Philosophy (PhD)

First Advisor

Martin Boileau

Second Advisor

Miles Kimball

Third Advisor

Alessandro Peri

Fourth Advisor

Adam McCloskey

Fifth Advisor

Katie Moon

Abstract

In the first chapter, I identify how the Fed's dependence on unconventional monetary policy after the 2007-2008 financial crisis and its return to conventional policy in 2015 have affected the global influence of U.S. monetary policy. I divide the sample into three phases according to the Fed's monetary policy regimes: pre-crisis (Aug 2001 - Nov 2008), crisis (Nov 2008 - Dec 2015), and post-crisis (Dec 2015 - Sep 2017). Daily variations in government bond yields and foreign exchange spot rates for 46 countries on FOMC meeting days show that the influence of U.S. monetary policy surprises intensified after the financial crisis. Responses are stronger in a group of emerging markets than in developed economies. I also find that more flexible exchange rate regimes lead to larger magnitudes of responses to U.S. monetary policy surprises. My results show that the decoupling of interest rates between the U.S. and other countries forced foreign financial markets to respond sensitively to U.S. monetary policy surprises after the financial crisis.

In the second chapter, I examine whether the global transmission of U.S. monetary policy surprises to stock price indexes and term spreads in G7 economies changed after the 2007-2008 financial crisis. I estimate a vector error correction model using monthly data spanning 2001-2017. I find that monetary tightening induces a reduction in stock price indexes and term spreads before the crisis. This confirms the conventional view of the effects of monetary policy on stock and bond markets. However, an unanticipated tightening in U.S. monetary policy leads to an increase in stock price indexes and term spreads in the post-crisis period. This positive response is at odds with the conventional view. A plausible explanation attributes a role to a bubble component of asset prices. Keeping interest rates close to the zero lower bound for many years in G7 countries may have led to a lower borrowing cost, which would presumably increase the size of an asset bubble. As a result, the Fed's tapering of quantitative easing and raising the Fed Fund rates since 2015 would lead to a surge in stock prices.

In the final chapter, I investigate the effect of real exchange rates on international trade through monetary policy. I estimate a vector autoregression model using monthly data from China, Japan, and Korea spanning 2001-2017. I find that an innovation in U.S. monetary policy shocks leads to an immediate increase in the trade volume in Korea. However, real effective exchange rates and trade volumes move to same direction in China, which is at odds with the conventional view on the relationship between exchange rate and trade. Likewise, a depreciation of local currency due to a contractionary U.S. monetary policy improves the trade balance in Korea but it leads to a deterioration in the trade balance in China. The heterogeneous responses in Korea and China may be attributed to the different extent of global value chain participation between large and small open economies.

Included in

Economics Commons

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