Work detail

The Effectiveness of Unconventional Monetary Policy Tools at the Zero Lower Bound: A DSGE Approach

Author: Mgr. Simona Malovaná
Year: 2014 - summer
Leaders: doc. Mgr. Tomáš Holub Ph.D.
Work type: Economic Theory
Language: English
Pages: 119
Awards and prizes: M.A. with distinction from the Dean of the Faculty of Social Sciences for an excellent state-final examination performance and for an extraordinarily good masters diploma thesis.
Abstract: The central bank is not able to further ease monetary conditions once it ex-
hausts the space for managing short-term policy rate. Then it has to turn its
attention to unconventional measures. The thesis provides a discussion about the
suitability of difierent unconventional policy tools in the Czech situation while
the foreign exchange (FX) interventions have proven to be the most appropriate
choice. A New Keynesian small open economy DSGE model estimated for the
Czech Republic is enhanced to model the FX interventions and to compare dif-
ferent monetary policy rules at the zero lower bound (ZLB). The thesis provides
three main findings. First, the volatility of the real and nominal macroeconomic
variables is magnified in the response to the domestic demand shock, the for-
eign nancial shock and the foreign in ation shock. Second, the volatility of
prices decreases significantly if the central bank adopts price-level or exchange
rate targeting rule. Third, intervening to fix the nominal exchange rate on some
particular target or to correct a misalignment of the real exchange rate from its
fundamentals serves as a good stabilizer of prices while intervening to smooth the
nominal exchange rate movements increases the overall macroeconomic volatility
at the ZLB




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