Three Essays in Monetary Policy

Abstract

This thesis examines critical and timely issues in monetary policy, focusing on balance sheet strategies, forward guidance, and commodity price dynamics. The first essay employs a New Keynesian Dynamic Stochastic General Equilibrium (NK-DSGE) model calibrated to Canadian data to evaluate central bank balance sheet policies during crises marked by simultaneous adverse shocks. Comparing five policy scenarios - including corridor/floor systems, quantitative easing (QE), tightening (QT), and tapering - the findings show that QE during crises followed by QT in recovery optimizes outcomes under pre-crisis corridor systems, while maintaining a floor during crises with post-crisis bond sales is superior under pre-crisis floor systems. Both strategies enhance macroeconomic stability, inflation control, and welfare.

The second essay addresses the qualitative dimension of monetary policy, particularly forward guidance, by proposing a novel identification strategy using sentiment analysis of news articles around Federal Open Market Committee (FOMC) meetings. Quantifying sentiment shifts related to interest rate guidance, balance sheet policies, and economic outlooks, it demonstrates that media-driven sentiment aligns with actual policy impacts, offering insights into expectation formation and financial market transmission. This approach mitigates endogeneity concerns in existing literature while disentangling forward guidance into its distinct components.

The third essay investigates the underexplored link between U.S. unconventional monetary policy and commodity price surges post-pandemic. Combining vector error correction models (VECM), structural VARs (SVAR), and event studies, it shows that a 1 percentage point (pp) rise in the effective federal funds rate (EFFR) reduces commodity prices by 3.66 %, while a 1 pp cut in the proxy funds rate (PFR, representing unconventional policies) increases them by 47.65 %. Short-term effects are pronounced: contractionary EFFR shocks drive a 5 % decline, while expansionary unconventional shocks yield a 20 % rise within six months. Hawkish forward guidance sentiment further amplifies speculative behavior, underscoring unconventional policy's role in commodity market volatility.