Essays on Monetary Policy and Financial Crises

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Erler, Alexander:
Essays on Monetary Policy and Financial Crises.
Bayreuth , 2014 . - XVI, 153 S.
( Dissertation, 2014 , Universität Bayreuth, Rechts- und Wirtschaftswissenschaftliche Fakultät)

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Abstract

The aim of this thesis is to analyze the role of central banks in the context of financial crises. In particular, the thesis examines (i) the potential monetary policy’s role in causing a financial crisis and (ii) the central bank’s management in times of crises.

After a brief introduction in chapter 1, chapter 2 examines if US monetary policy implicitly responds to asset price booms. Using real-time data and a GMM framework, a Taylor-type rule with an asset variable that captures phases of booms and busts in the real estate market is estimated and yields two main findings. Firstly, the Fed does implicitly respond to asset price booms in the real estate market. Secondly, these responses are typically pro-cyclic. This finding indicates that the interest rate setting behavior of the US monetary policy implicitly contributes to increase the risk of financial crises.

Chapter 3 analyzes the economic costs associated with the central banks’ decisions to intervene or not to intervene in case of speculative attacks. The central bank can either abstain from intervening or start an intervention, which in turn can be successful or unsuccessful. Therefore, the analysis takes into account three different types of currency crises: (i) an immediate depreciation, (ii) a successful defense, and (iii) an unsuccessful attempt to defend the exchange rate. The empirical study reveals that the decision of the central bank to intervene is risky. If the central bank intervenes and succeeds she can on average achieve the best growth performance. However, if the interventions are not maintained and the currency depreciates the subsequent output loss is particularly severe. Abstaining from an intervention yields a scenario with a relatively small drop in output.

Chapter 4 extends the previous analysis and takes a closer look at the economic dynamics after a speculative attack. The results indicate that the macroeconomic developments differ considerably with respect to the three different types of crises. Monetary authorities therefore play a central role in determining the economic course and costs of currency crises.

Chapter 5 analyzes the role of the TARGET2 system against the background of the European debt and banking crisis. In particular, the real gains and losses of holding TARGET2 claims in the case of Germany are assessed. The analysis finds that by the end of 2013 Germany has incurred accumulated losses of around 13 billion euros in real terms (’99 const. prices). Calculating the losses and gains of every member country in the euro area suggests that the TARGET2 system can be considered an implicit redistribution mechanism with a volume of about 30 billion euros (current prices). The TARGET2 system cannot replace necessary reforms, but can provide time and money to reduce intra-EMU imbalances.

Finally, chapter 6 outlines the most important results and concludes with a summary.