Maia da Cunha, Guido (2024) Essays on monetary policy, sovereign debt and financial conditions. PhD thesis, London School of Economics and Political Science.
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Abstract
The first chapter studies the optimal maturity policy of sovereign debt within the framework of long-scale asset purchase (LSAP) programmes. It presents a model wherein the fiscal authority must navigate interest rate risk alongside a central bank engaging in LSAPs. The model predicts that levels of agreement and coordination between the fiscal authority and the central bank’s optimal policies vary depending on the macroeconomic conditions that prompt LSAPs. These predictions find support in empirical evidence from the US, indicating that the Treasury has adjusted its response to the Fed’s maturity extraction policies based on the prevailing macroeconomic environment. The second chapter proposes a novel approach to extract factors from large data sets that maximise covariation with the quantiles of a target distribution of interest. From the data underlying the Chicago Fed’s National Financial Conditions Index, we build targeted financial conditions indices for quantiles of future US GDP growth. We show that our indices yield considerably better out-of-sample density forecasts than competing models, as well as insights on the importance of individual financial series for different quantiles. Notably, leverage indicators co-move more with the median of the predictive distribution, while credit and risk indicators are more informative about downside risks. The third chapter studies bank lending decision when banks play a central role in deposit and money creation while being subject to balance sheet constraints. It analyses how bank lending is affected by the banks’ balance sheet dynamics in a low interest rates environment. In addition, it replicates a liquidity shock such as the one that hit the U.S. Treasuries market in March 2020, finding that capital requirements may limit banks’ activities in bond markets following shocks like this. Finally, it shows that when banks’ leverage reaches high levels, QE can transform liquidity crises into credit crises, worsening banks’ situation.
Item Type: | Thesis (PhD) |
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Additional Information: | © 2024 Guido Maia da Cunha |
Library of Congress subject classification: | H Social Sciences > HG Finance H Social Sciences > HJ Public Finance |
Sets: | Departments > Finance |
Supervisor: | Oehmke, Martin and Ray, Walker |
URI: | http://etheses.lse.ac.uk/id/eprint/4774 |
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