Three essays on central banking and monetary policies: İnflation targeting, quantitative easing and time inconsistency of monetary policy

Monetary policy is important in maintaining economic stability, controlling inflation, promoting growth, managing business cycles, stabilizing exchange rates, and maintaining financial market stability. Therefore, central banks can influence these macroeconomic variables with the help of various instruments and strategies. Thus, monetary policy implementations are essential in leading national economies to prosperity. In this thesis, inflation targeting, Quantitative easing, and the time inconsistency problem, among the most current issues in the field of monetary policy, are examined using a large sample and different analysis methods. While the Monetarist and New Keynesian schools of economics emphasize the impact of monetary policy on economic variables, the New Keynesian school adopts the micro-based macro modeling approach adopted after the Lucas critique. It conducts policy analysis by constructing dynamic stochastic general equilibrium (DSGE) models. These models are considered a standard tool in modern macroeconomics to bridge the gap between micro-based macroeconomic theory and data. This feature of DSGE models makes them a widely used tool for empirical research in macroeconomics and policy analysis and forecasting in central banking. In this context, the second part of the study analyses how macroeconomic variables are affected in the presence of internal and external shocks when the extended Taylor rule is applied as a monetary policy function in Turkey under the dynamic stochastic general equilibrium (DSGE) model for the period 2006:Q1- 2021:Q4 using the Bayesian method. The findings suggest that monetary policy following the extended Taylor rule mediates the transmission of macroeconomic shocks by smoothing household borrowing dynamics. The policy rate the central bank applies significantly impacts the nominal exchange rate, actual output, and consumer prices. In an environment of rising market interest rates, firms in the agricultural, industrial, and construction sectors initially front-load their future work, increase their turnover by selling inventories of final products and lead to an increase in sectoral production. The rise in output generates a positive supply shock and leads to a fall in sectoral producer prices. On the other hand, firms in the service sector are susceptible to changes in interest rates due to higher working capital requirements, higher leverage, and price stickiness. A positive interest rate shock, hence a good exchange rate shock, leads to a fall in output in these sectors and increases inflation pass-through. Most central banks of advanced economies have implemented Quantitative easing (QE) as a measure of unconventional monetary policy to stimulate the economy since the 2008 mortgage crisis. This is an unorthodox policy of injecting money into the economy to fight recession. However, the theoretical framework, transmission channels, and effectiveness of these unconventional monetary policies continue to be the focus of theoretical and empirical debates. For this reason, the third part of the study analyses the impact of the QE on key macroeconomic indicators such as output growth, inflation, and interest rates for the period 2002Q1-2022Q2 for the US, Euro area, UK, and Japan economies. For this purpose, the stationarity of the variables is tested with the second-generation unit root test with multiple structural breaks developed by Carrion-i-Silvestre et al. The contribution of the study to the literature is the first application of the Hacker and Hatemi-J (2006) test, which takes into account the asymmetric relationship between the variables in Question, and the Rolling Windows Causality test of Balcılar et al. (2010), which shows the causality of the variables in different periods. As for the findings of the related section, while the QE is favorable for real GDP growth in all sample countries in certain sub-periods, its effects on interest rates and inflation differ in the US, Euro area, UK, and Japan economies. In the fourth part of the paper, the time inconsistency problem of monetary policy in Turkey is addressed using the asymmetric preference parameter in the central bank's linear, exponential loss function. The fact that most of the recent results on the time inconsistency problem under symmetric preferences are no longer valid under asymmetric preferences emphasizes the importance of asymmetric central bank preference. First, the conditional mean and conditional variance of the output gap are estimated for the years 2006:Q1-2009:Q4, 2010:Q1-2017:Q4, and 2018:Q1-2021:Q2 after the central bank adopted explicit inflation targeting and after the 2008 financial crisis, and then the reduced form of the model is estimated to measure time inconsistency. The empirical results in the section show that the Central Bank faces the problem of time inconsistency in monetary policy over the entire sample period. Moreover, it is found that the Central Bank's monetary policy preferences are generally asymmetric concerning the output gap in the 2006:Q1-2021:Q2 period. The asymmetric preference parameter implies that the monetary authority has an asymmetric policy preference in response to the economy during the recession and boom periods. This situation can be interpreted as the Central Bank's preference for different policy implementations in contraction and expansion periods according to the current economic conditions. Keywords: Monetary policy, unconventional monetary policy, central bank, dynamic stochastic general equilibrium model, quantitative easing, time ınconsistency, rolling windows causality