Essays on the effects of monetary policy

Sammanfattning: This dissertation consists of three essays, each of which addresses issues that are relevant to the implementation of monetary policy.The first essay, "Bank Loans and the Transmission Mechanism of Monetary Policy," considers one of the transmission mechanisms of monetary policy, the bank lending channel. This mechanism is analysed and estimated. The theory emphasises the role of banks. Banks are important because of asymmetric information in the financial market and because banks are assumed to handle this problem better than other lenders. Banks therefore give loans to borrowers that, because they are subject to asymmetric information problems, find it costly or perhaps impossible to issue bonds in the private bond market. Loans from an intermediary and bonds issued at the bond market can therefore not be seen as perfect substitutes, which is often assumed in the macro economic literature. Further also banks find loans and bonds to be imperfect substitutes since it is assumed that it is costly for a bank to change the relation between the possession of bonds and loans in its portfolio.By changing the amount of deposits and thereby the availability of loans in the bank sector the central bank influences aggregate demand in the economy through a bank lending channel, assuming prices are temporarily sticky. Under certain conditions it follows that the bank lending channel works in line with the ordinary money channel and the effect of monetary policy on aggregate income is hence enhanced.It is then tested for the importance of this channel using Swedish data. As predicted by the bank lending channel the mix between bank loans and other sources of financing and the spread between the loan rate and the bond rate are significantly altered after a change in the stance of monetary policy. Real effects are tested for simultaneously. It follows that both the mix and the spread have real effects on the economy and that the effects of monetary policy is enhanced. A number of countries have adopted inflation targeting in various forms as the framework for monetary policy. Even if the arguments for inflation targeting have been widely accepted, many problems of how to implement such a policy in practice remain to be solved. The second essay, "Implications of Inflation Targeting," contains an analysis of how the central bank should set its operating instruments in order to control its target(s). It is also analysed for how long the actual and the targeted inflation rate can be accepted to deviate under different policy regimes and how different stabilisation goals affect the variability in inflation, output and the short term interest rate. For that purpose a simple model for the Swedish economy is estimated.The third essay is entitled "An Expectations-Augmented Phillips Curve in an Open Economy." Here an expectations-augmented Phillips curve relation in an open economy is derived and estimated. As in Rotemberg's (1982) model firms are assumed to face quadratic price adjustment costs. In addition, second-order costs of changing prices are included. Consequently the derived inflation equation incorporates not only a forward-looking component but also a backward-looking element. The model is then estimated on Swedish data. The results from this estimation shed light on the importance of inflation expectations, in comparison to past inflation rates, for the development of current inflation. This is, for example, of great importance to a central bank trying to achieve an inflation target. A common characteristic of inflation targeting models is that with a lower degree of persistence in inflation, a credible central bank can achieve its inflation target with relatively little loss in output.