Innovations in Monetary Policy

The turn of the century brought with it a period of stability, both for the global macroeconomy, but also for the consensus view of how monetary policy could and should operate within it. Policymakers and academics widely agreed that control of the short-term nominal interest rate was sufficient to achieve price stability and moderate the worst of the economic cycle. However, more recent history has shown this view of the world to be a best overly simplistic, and at worst, dangerously flawed. Short-term interest rates have become constrained by their lower bound and monetary policymakers have turned to a range of alternative, unconventional policy measures in pursuit of their objectives.

This thesis looks to investigate some of the reasons why the previous paradigm failed and starts to assess the range of innovations that have come in to play as part of the fundamental reassessment of the policy framework. It does this from the point of view of theory, but also empirically, employing econometric techniques to quantify the impacts of recent large-scale asset purchase programmes by central banks. Finally, it looks to develop a detailed model which begins to address some of the limitations of the pre-crisis paradigm by including a role for money which can be created by either policymakers, or the financial sector.