Monetary and Macroprudential Policy and the Labour Market

  • Manuel Gloria

Student thesis: Phd


This thesis studies the welfare performances of some optimal simple monetary and macroprudential policy rules in two New-Keynesian Dynamic Stochastic General Equilibrium (NK DSGE) models, featuring different types of agents, labour and financial market frictions and calibrated to match some second moments of the US economy. In chapter 2, a Two-Agent New-Keynesian (TANK) model, in which a fraction of households cannot smooth consumption across periods, is augmented with nominal wage rigidity and search and matching frictions to investigate weather aggregate welfare can be improved by targeting directly some labour market variables in the monetary policy rule. It is shown that, although in the benchmark model in which the economy is only hit by a productivity shock a rule targeting a combination of price and nominal wage inflation is welfare enhancing, a more standard specification responding to price inflation and output is optimal in the fully calibrated model, in which demand shocks tend to prevail. However, if the primary goal of the central bank was to reduce average consumption inequality between the two groups, targeting nominal wage inflation would be again desirable, as this efficiently stabilizes the labour share. In chapter 3, a borrowers-savers model is used to study how macroprudential policy can mitigate welfare losses when the economy faces an exceptionally asymmetric shock such as the Covid-19 pandemic. To do so, the baseline model is expanded to a two-sector (where only the industry requiring social interactions is affected) and four-agent economy, in which borrowers and savers are further categorised according to their occupation (allowed to work during the pandemic or not), and welfare is studied at both aggregate and disaggregate level. First, it is shown that, contrary to what found in other works in the borrowers-savers DSGE literature, relaxing financial conditions by increasing the long-run Loan-to-Value (LTV) ratio boosts aggregate welfare and, for low enough values of the borrowers' discount factor, is Pareto-efficient, as it improves the welfare of all agents. Second, although when looking at optimal countercyclical monetary and macroprudential policy rules a Pareto-improving combination is not possible, and aggregate welfare gains can only be obtained at the expenses of borrowers, a potential solution is the introduction of a fiscal subsidy aimed at reducing directly interest rate payments of borrowers affected by the pandemic. This subsidy, financed by a lump-sum tax and of an amount pinned down by a simple fiscal transfer rule, is able not only to further increase aggregate welfare, but also to improve at the same time welfare of both borrowers and savers working in occupations affected by the pandemic.
Date of Award1 Aug 2023
Original languageEnglish
Awarding Institution
  • The University of Manchester
SupervisorGeorge Bratsiotis (Supervisor) & Michele Berardi (Supervisor)

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