Browsing by Subject "quantitative easing"

The role of central banks has increased in the past years, especially during the recovery from the COVID-19 pandemic, but their main policy goal also remains focused on maintaining price stability. However, this goal has become problematic as inflation exceeds their 2 percent target. The zero lower bound has initiated the adoption of unconventional methods, such as quantitative easing, to influence policy. Quantitative easing operates through various transmission channels, one of which is the portfolio rebalancing channel. In this channel, investors must rebalance their portfolios due to central banks purchasing government bonds, prompting the search for substitutes. This process leads to an increase in the price of all assets, creating a wealth effect. This thesis aims to investigate the role of the wealth effect as an inflation driver. Structural vector autoregressive models have become the backbone of monetary policy analysis. However, the shock of interest must be identified by imposing restrictions on the model. In this thesis, sign and narrative sign restrictions were used. Traditional sign restrictions alone were not an option due to the variable dynamics. The empirical application of this thesis was based on Bayesian estimation, assuming non-Gaussian error terms. In the Bayesian estimation, a Differential Evolution Markov Chain algorithm was utilized. The results of the empirical application yielded somewhat controversial findings. On one hand, unconventional monetary policy did contribute to the wealth effect. On the other hand, the wealth effect did not contribute to inflation. Interestingly, the impulse response functions did not show a significant impact of the unconventional monetary policy shock itself, which contradicts the findings of previous literature. The impulse response functions of the entire model revealed the existence of more powerful inflation drivers in the economy, indicating potential topics for future research. Additionally, the results varied when considering different time periods, suggesting changes in the dynamics of the economy.