This dissertation is a collection of three essays that explore the transmission channels through which the monetary and the exchange rate policy affect the economy. Chapter 1 proposes and investigates the transmission channels through which the ECB's corporate sector purchase program (CSPP) exerted influences on the economy using a data set on the bond issuance and the syndicated loan in European countries. I find the direct effect of the ECB's bond purchase by substantially reducing the issuance spread of the CSPP-eligible bond by 21%. The direct effect led to an increase in the amount of bond issuance by 25% and a reduction in the bank loan demand by the bond issuers by 36% after the CSPP announcement. Moreover, I find the spillover effect following the debt substitution by bond issuers. The banks in closer relationships with the CSPP-eligible bond issuers received more early loan repayment and lost more lending opportunities from the bond-issuer clients. In turn, the banks that have one-standard-deviation more exposure to the CSPP-eligible bond issuers are found to redirect additional loan supply towards the non-bond-issuer corporations by 3%. Chapter 2 stems from the debate on the optimal exchange rate regime for emerging market, which is far from conclusive. In the presence of nominal rigidity, the conventional wisdom for small open economies is that flexible exchange rate regime insulates countries from the adverse effects of external shocks. I develop a small open economy general equilibrium framework that features nominal price rigidity, external debt and the financial accelerator mechanism. The goal is to explore the interaction between exchange rate regimes and external shocks. The counterfactual exercises suggest that the relative strength between financial channel and trade channel plays a crucial role in determining the cost and the benefit of a specific exchange rate regime in an open country. Chapter 3 studies a novel transmission channel for exchange rate policy in emerging markets that acts through financial institutions. According to this “credit-supply channel,” banks in emerging markets fund themselves in U.S. dollars, lend in the local currency, and bear foreign exchange risk if hedging is imperfect. This currency mismatch exposes banks to exchange rate fluctuations and makes economies vulnerable to adverse global financial conditions. Using loan level data in Taiwan during 2012-15, I provide evidence that the effect of depreciation on credit supply is contractionary. Banks with higher net USD liabilities cut lending more and were less likely to renew loans to firms with which they had pre-existing relationships. In turn, firms with greater dependence on exposed banks hardly switched to alternative funding sources and disproportionately decreased investment and employment as compared to other firms that relied less on these banks. I find that the credit-supply effects of depreciation on investment and employment are both economically and statistically significant.

This dissertation revolves around robustly measuring and using the information sets of the centralbank and financial markets in order to measure exogenous monetary policy. Modern central banks aggressively use all the available information at their disposal to effectively set monetary policy. This problem of “foresight” renders traditional time series methods ineffective; the information edge of central banks is too large. In the first chapter, I discuss refinements to existing narrative methods, which attempt to the central bank’s own forecasts to capture the information set of the central bank, thus removing their information edge over the econometrician. In the second chapter, I explore how the information sets of financial agents differ central banks and show that there is little direct information transfer between central banks and financial markets around monetary policy actions. Finally, the third chapter details how to use the information sets of financial sector actors to estimate exogenous monetary policy actions that is robust to financial sector revisions about the economy which can be due to the monetary policy actions.

My dissertation combines structural macroeconomic models with analyses of macro and micro data and broadly contributes to two research agendas. The first relates to the channels through which monetary policy impacts the economy. The second aims to understand how heterogeneity observed at the micro level affects the economy. The first two chapters, "Monetary Policy and Heterogeneous Mortgage Refinancing" and "A Model of Heterogeneous Mortgage Refinancing," focus on the refinancing channel of monetary policy. Since fixed-rate mortgages are the most significant source of household debt in the U.S., monetary policy can stimulate household consumption and wealth by lowering mortgage costs through refinancing. The potency of this channel will depend on households’ outstanding mortgage rates, as well as their willingness and ability to refinance. I combine empirical patterns from monthly loan-level data (from joint work with A.Burya) and a heterogeneous agent model of mortgage refinancing to show that credit score heterogeneity dampens the aggregate consumption response to monetary policy by 11%. The third and fourth chapters, "Anchoring of Inflation Expectations: An Empirical Test" and "Anchoring of Inflation Expectations: Role of Risk Premia," study the effectiveness of monetary policy in the U.S. by exploring the degree to which inflation expectations are anchored. If inflation expectations are well-anchored, then the Fed has a higher capacity to support aggregate employment when necessary, without destabilizing inflation. In joint work with A. Burya and S. Mishra, I construct a proxy of the change in the Fed's aggressiveness to inflation and develop an empirical test for inflation expectations anchoring. The proxy of the changes in the Fed's aggressiveness is equal to changes in expectations of future policy rates that are unexplained by the information contained in the inflation news release. The empirical test involves examining the sensitivity of inflation expectations to monetary policy shocks conditional on that proxy. I then use a measure of inflation expectations adjusted for inflation and liquidity risk premia to demonstrate that bond yield data in the U.S. is consistent with the anchoring of the long-term inflation expectations.

This dissertation studies topics in the areas of international finance. In the first chapter, the Unintended Consequences of Financial Sanctions, I study the economic impact of the U.S. financial sanctions against Russian companies in the aftermath of Russia's annexation of Crimea in 2014. I show that this sanctions program, which primarily cut off access to international financial markets for sanctioned firms, produced an unintended consequence of strengthening the sanctions targets relative to their unsanctioned peers. Specifically, while the policy successfully halted new international borrowings by sanctioned companies, the spillover impact of the policy resulted in these targets shrinking in size by less than unsanctioned Russian firms. To explain these results, I argue that sanctions led to a reallocation of domestic resources in favor of sanctioned firms. In particular, sanctions precipitated capital crowding out and credit rationing, causing unsanctioned domestic borrowers to suffer more from the policy. The research highlights the limitation of "targeted sanctions" and also sheds light more broadly on the impact of international financial integration and capital flows on firm size dynamics. In the second chapter, Quantitative Analysis of Sanctions Policy, I theoretically and quantitatively analyze the impact of financial sanctions on the target firms and the target economy. I introduce a heterogeneous firm model with segmented capital markets and financial frictions in which sanctions against international borrowers led to capital crowding out and credit rationing among domestic borrowers. I calibrate the model to the 2014 U.S. financial sanctions episode and use the model to estimate the impact of sanctions on firm sizes and macroeconomic variables. I also evaluate policy alternatives and identify factors for policymakers to consider in calibrating future sanctions programs. I conclude by discussing the 2022 sanctions program and inferring broader policy implications. In the third chapter, the Impact of Monetary Policy on the Specialness of U.S. Treasuries, I estimate the causal effect of monetary policy on the specialness of U.S. Treasuries. Quantifying this specialness by the U.S. Treasury Premium, which is the difference in the convenience yield of U.S. Treasuries and that of government bonds of other developed countries measured as the deviation from covered interest parity between government bond yields, I find that monetary tightening by the Federal Reserve increases the specialness of U.S. Treasuries primarily by increasing the convenience yield of U.S. Treasuries. I also find that the magnitude of the impact varies across the term structure and across countries, especially after the Global Financial Crisis, and U.S. and foreign monetary policy shocks have asymmetric impacts on the specialness of U.S. Treasuries. These results provide evidence for the unique ability of the Federal Reserve to affect the specialness of U.S. Treasuries by altering the supply of dollar safe assets.