Caracciolo, Gherardo Gennaro; (2022) Essays on Unconventional Monetary Policies. Doctoral thesis (Ph.D), UCL (University College London).

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Abstract

This thesis studies the effects of unconventional monetary policies on social welfare and macroeconomic stability, alongside their interaction with fiscal policies. Chapter 1 analyses how the effectiveness of central bank communication depends on its precision (the noise in the communication) and its accessibility (the fraction of agents it reaches). Most of the existing theoretical work on central bank communication focuses on one or the other dimension, neglecting their interdependence. In this Chapter I show that accounting for their interaction is essential for optimal communication design. Within two different information structures, I show that disclosing too precise information is detrimental if it reaches a small audience, even if the alternative is no disclosure to anyone. The optimal degree of precision is increasing in the share of people who can understand it. My analysis suggests it is better to provide simple and clear statements rather than very detailed information that only few can understand. Chapter 2 (joint work with Marco Bassetto) studies how the well known connection between monetary and fiscal policy manifests itself in the context of the Eurozone, where that connection links the European Central Bank, the 19 national central banks, the Treasuries of 19 countries, and the European Union. The goal is twofold. First, we wish to clarify how seigniorage flows from the monetary authority to the budget of each country. Second, we seek to answer the question of how the taxpayers of each country are affected by a default of one of the participants to the union. In answering this question, we analyze the mechanisms that ensure (or do not ensure) that net liabilities across countries stay bounded, and I establish how the answer depends on the liquidity premium that each category of assets commands (cash, excess reserves within the Eurosystem, and government bonds). We find that the official risk-sharing provisions of the policy of quantitative easing (QE), whereby national central banks retain 90% of the risk intrinsic in bonds of their own country, only holds under restrictive assumptions; under plausible scenarios, a significantly larger fraction of the risk is mutualized. Chapter 3 revisits the question of how a central bank should communicate. In this Chapter, alongside precision, I take into account another fundamental feature of com- munication: credibility. Standard economic practice suggests that central banks should uncontrovertibly maximise their credibility. However, through a new theoretical framework, I show that under realistic circumstances, this might not be consistent with welfare maximisation.

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