Date of Degree


Document Type


Degree Name





Thom B. Thurston

Committee Members

Christos I. Giannikos

Sangeeta Pratap

Subject Categories

Econometrics | Finance | International Economics | Macroeconomics


Monetary Policy, Macroprudential Policy, Financial Frictions, Exchange Rate Targeting


Chapter 1 Using a medium scale general equilibrium New Keynesian business cycle model with macroprudential policy and news shocks I study the effectiveness of various combinations of the monetary and macroprudential policies. I incorporate defaults both in the banking sector and households. The results show that out of the policy strategies considered the standard Taylor rule combined with the LTV requirement that reacts countercyclically to the deviation of house prices from the steady state yields higher welfare as compared with all the other strategies considered. Additionally, the standard Taylor rule combined with either of the countercyclical LTV requirements mitigates the effects of the unrealized anticipated shocks substantially more than the strategy of using the standard Taylor rule and constant LTV requirement.

Chapter 2 We examine the effectiveness of nominal exchange rate targeting rule measured in volatility and welfare as compared with a standard and augmented interest rate rules. We build a small open economy dynamic general equilibrium model with tradable and nontradable sectors and a sector-specific investment. We find the impulse responses of the endogenous variables differ both qualitatively and quantitatively under the exchange rate rule as compared with the interest rate rule. There is no exchange rate overshooting under the exchange rate targeting in contrast with the standard interest rate rule. The results show that there is a wide range of the interest rate rule parameters for which the interest rate rule yields a lower macroeconomic volatility as compared with the exchange rate rule. In contrast the exchange rate rule yields higher social welfare for most of the inflation and output reaction parameters. However, when we augment the standard interest rate rule with the nominal depreciation term, we find there is a cutoff value of the nominal depreciation rate parameter after which the augmented interest rate rule becomes welfare superior.

Chapter 3 I study the equilibrium determinacy in a standard New Keynesian model with a banking sector enriched by incorporating the lending relationships - deep habits - in the credit markets. I analyze simple and augmented Taylor rules, and I find that the presence of deep habits in the credit markets matters for the equilibrium determinacy. The deep habits parameter, the credit spread, and the lending relationship persistence parameter affect the model determinacy.

Chapter 4 Opinion in favor of nominal GDP targeting recently has been rising in monetary policy literature (e.g., Ireland, 2020; Garin et al., 2016; Beckworth and Hendrickson, 2020). Calibrated New Keynesian models have tended to support the proposition that nominal GDP targeting will provide welfare improvement over those obtained with alternative strategies such as inflation targeting and Taylor rules with ”standard” parameter settings. This paper examines that proposition in the context of a medium-scale New Keynesian model with a financial sector. Our results indicate that nominal GDP targeting does poorly as compared with inflation targeting and a wide range of Taylor rule settings leading up to the optimal (representative utility maximizing) Taylor rule. The presence of the financial sector reveals the effects of different monetary strategies on the volatility of key financial variables. We find that the choice of a nominal GDP target over the other strategies will increase financial variable volatility. Interestingly, the model reveals that the ”smoothing” parameter in the Taylor rule actually reduces policy rate volatility as it is raised from 0 to 1, and up to a point reduces financial variable volatility as well.