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Open Access Publications from the University of California

Essays On Monetary Policy Transmission

  • Author(s): Gonzalez, Mario Raul
  • Advisor(s): Walsh, Carl E
  • et al.

In this dissertation, I contribute to the study of how monetary policy shocks are transmitted through the economy. I contribute to this literature by analyzing how different economic structures can alter the transmission of monetary policy shocks, both at an international level, by considering its regional impact, and at a domestic level, by discussing the implications of different levels of financial constraints and by studying how local financial markets react to monetary policy announcements.

At the international level, the empirical literature has found that banks, through their complex interconnections, play an important role in the transmission of monetary policy decision in the countries they serve. It has also been found that international banks activate a cross-border internal capital market to accommodate for monetary shocks. In order to assess these findings from a theoretical point of view, in the first essay, I develop a novel regional open economy dynamic stochastic general equilibrium model by combining different aspects of a two-country type model and a small open economy type model. The results are consistent with those of the empirical literature; when banks with international presence are able to activate an internal capital market, the effects of monetary policy on the domestic economy are subdued. This also leads banks with international presence to transmit monetary policy shocks to other countries where the bank has offices.

At the domestic level, in the second essay I present a medium scale DSGE framework to analyze the effects of monetary policy shocks on the domestic economy. The novel feature of the model is that analyze these effects in the contest of two separate group of firms. The first group of firms finance their operation by selling bonds directly to households. The second group of firms obtain loans from financial institutions and face financial constraints. The results of the model show that financially constrained firms present a subdued response to monetary policy shocks, while unconstrained firms present a stronger response. The results show that models without any financial constraint exhibit a stronger response to monetary policy shocks. In that sense the model implies that monetary policy officials may need to make stronger moves of the monetary policy rate in an economy where financial development is lower and firms face stronger financial constraints.

In the third essay, cowritten with Raul Tadle, we study how the Chilean stock market is affected by monetary policy announcements made by the Central Bank of Chile. We do this by studying the information contained in the monetary policy press releases. Using Automated Content Analysis we built an index, the \emph{Sentiment Score} that tracks the verbal signals indicating future likely monetary policy decisions. The results show that the \emph{Sentiment Score} leads changes in the monetary policy rate. We then evaluate how the surprise component of the sentiment score impact Chilean financial assets. We find that from the beginning of the sample to August 2008, the stock markets seems to react to surprises in the monetary policy rate, but surprises in the sentiment component are not significant. On the other hand, after August 2008 to the end of the sample, we find that surprises in the monetary policy rate are not relevant for the stock market, but surprises in the sentiment component show significant effects on the stock market.

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