Three Essays On The Interaction Of Monetary Policy And Long Term Interest Rates PDF Download

This thesis studies the interaction of monetary policy and financial markets. The thesis examines the impact of monetary policy shocks on the cross-section of bond prices (e.g., government and corporate bonds). It also analyzes how monetary policy interacts with the portfolios of financial intermediaries and households. In the first chapter, Heterogeneous Intermediaries and Bond Characteristics in the Transmission of Monetary Policy, together Federic Holm-Hadulla, we study the transmission of monetary policy to the corporate bond market. We show that corporate bond purchases by the central bank give rise to credit spread shocks, whereas government bond purchases mainly cause term spread shocks. The yields of bonds held by different intermediaries respond heterogeneously to the two shocks because intermediaries systematically select different types of bonds. We explain these findings through the lens of a model of the fixed-income market with multiple risk factors. Insurance companies and pension funds select into assets with high interest-rate risk exposure to match their long-duration liabilities. The mutual fund sector instead absorbs securities that carry credit risk. Different policy tools affect the market prices of risk factors differentially, thereby redistributing risks across intermediary sectors and ultimately across the households investing in them. In the second chapter, Central Bank Communication and the Yield Curve, with Andrea Vedolin, Gyuri Venter, and Paul Whelan, we study the interaction between monetary policy and sovereign bonds in the Euro area. We argue that monetary policy in the form of central bank communication can shape long-term interest rates by changing risk premia. Using high-frequency movements of default-free rates and equity, we show that monetary policy communications by the ECB on regular announcement days led to a significant yield spread between peripheral and core countries during the European sovereign debt crisis by increasing credit risk premia. We also show that central bank communication has a powerful impact on the yield curve outside of regular monetary policy days. In the third chapter, Household Portfolios, Monetary Policy, and Asset Prices, together with Ciaran Rogers, we examine the role of the household portfolio rebalancing channel for the aggregate and redistributive effects of monetary policy. The transmission of monetary policy works not only through regular income and substitution motives but also through an endogenous portfolio rebalancing effect that generates changes in equilibrium asset prices and a subsequent wealth effect on consumption.