| This dissertation examines the transmission mechanism of monetary policy within NNS models. Chapter 1 begins by identifying twenty monetary policy periods, in the spirit of Romer and Romer's (1989) Narrative Approach , within six of the G7 countries. The approach here is twofold. Major historical events, like the OPEC oil shocks and the ERM crisis, are used along with narrative evidence, as a guide to identify ‘monetary policy periods’ that reflect the stance of monetary policy at central banks during those events. The significance of these monetary policy periods are then assessed using an instrumental variables approach. The results find the policy periods to be significant in the majority of the countries.;The second chapter constructs implied Euler equation rates using data from six of the G7 countries. NNS models equate the instrument of monetary policy to the interest rate implied by the consumption Euler equation. The key result is that an increase in the nominal interest rate leads to a fall in the implied Euler equation rate. Incorporating habit still yields the same result. The findings have a serious implication for the transmission mechanism of monetary policy since movements of money market rates, consumption and inflation cannot be reconciled through the consumption Euler equation, irrespective of how the rest of the NNS model is specified.;Chapter 3 examines the prediction implied by the transmission mechanism of monetary policy in NNS models, that real interest rates and expected consumption growth should be perfectly correlated. The empirical literature on monetary policy documents a ‘hump-shaped’ response of aggregate consumption to a monetary policy action, and the results in chapter 2 found the correlation between real interest rates and expected aggregate consumption growth to be low, and often negative. The third chapter incorporates heterogeneous agents into a NNS model with nominal inertia, to try and reconcile these facts. The key findings are that heterogeneity and wage inertia are needed to help reconcile these observations. |
