Effectiveness Of Unconventional Monetary Policy In Response To Financial Crisis

Accompanied by development of the monetary sector, the financial crisis is becoming more frequent, and financial crisis’s impact on the economy is also becoming stronger. Under the background of the financial crisis, appropriate monetary policy is of great significance because it will help the government make better policies, in order to maintain economic stability and output growth. In this thesis,1 have examined the effectiveness of unconventional monetary policies adopted by the Federal Reserve in response to financial crisis.Chapter 1 is the introduction. In this chapter, I have summarized the research background and significance of my thesis. I have discussed the global context in which unconventional monetary policy gains more and more public attention. Then I have put forward the originality and deficiencies of my thesis. Lastly I have introduced my research methodology and thesis structure.Chapter 2 is the literature review, where I have highlighted studies related to the issues of unconventional monetary policy. In this chapter, I have first reviewed related theories about unconventional monetary policy. I have arrived at a working definition for unconventional monetary policy and have presented a classification of unconventional monetary policies. Then I have reviewed both theoretical research and empirical studies regarding unconventional monetary policy. Chapter 2 lays the foundation for the theoretical approach and empirical study of my thesis.Chapter 3 is the theoretical approach. In this chapter, I have first introduced different theories of money, from the Keynesian to the modern quantity theory of money, and finally the rational expectation theory. Then I have introduced relevant theories on the effectiveness of monetary policy, including its definition, framework and transmission mechanism. Later I have discussed in detail different unconventional policy tools adopted by the Federal Reserve during financial crisis. Lastly I have analyzed the deficiencies and inadequacies related to the issues of unconventional monetary policy, as well as the influence of unconventional monetary policy on China and its implications for China.Chapter 4 is the empirical study. In this chapter, I have first summarized and classified different innovative monetary policy tools adopted by the Federal Reserve during financial crisis. Then I have built regression models to examine the effectiveness of unconventional monetary policy tools. I have concluded from the test results that the monetary policy tools related to credit support such as TAF, PDCF and AMLF are effective. Likewise, the monetary policy tools related to asset purchases such as TALF and MBS are also very effective.Chapter 5 is the concluding chapter. Based on the results from the theoretical approach and empirical study, I have drawn a final conclusion for my thesis. By combining normative and positive analyses, I have examined in detail the effectiveness of the unconventional monetary policies and concluded that these innovative policy tools are effective in stabilizing the financial market.In fact, conventional monetary policy is a very broad and complicated topic, and my thesis merely covers part of it. In my empirical study, I fail to examine their effectiveness to stimulate the economy, which is the latter step of the transmission mechanism. Besides, it is necessary to optimize econometric models and make better choices of policy variables. Lastly, I fail; to make an in-depth study about the application conditions and concrete implementation steps of the exit strategy of unconventional monetary policies. All these are potential directions for future studies.