This thesis, motivated by my reflections about the failings of monetary policy implementation as a cause of the sub-prime crisis, attempts to answer the following inquiries: (i) whether interest rates have played a major role in generating the house price fluctuations in the U.S., (ii) what are the effects of accommodative monetary policy on the economy given banks' excessive risk-taking, and (iii) whether an optimal monetary policy rule can be found for curbing credit-driven economic volatilities in the model economy with unconventional transmission channels operating. By using a decomposition technique and regression analysis, it can be shown that short-term interest rates exert the most potent influence on the evolution of the volatile components of housing prices. One possible explanation for this is that low policy rates for a prolonged period tend to encourage bankers to take on more risk in lending. This transmission channel, labelled as the risk-taking channel, accounts for the gap to some extent between the forecast and the actual impact of monetary policy on the housing market and the overall economy. A looser monetary policy stance can also shift the preference of economic agents toward housing as theoretically and empirically corroborated in the context of choice between durable and nondurable goods. This transmission route is termed the preference channel. If these two channels are operative in the economy, policy makers need to react aggressively to rapid credit growth in order to stabilize the paths of housing prices and output. These findings provide meaningful implications for monetary policy implementation. First of all, central bankers should strive to identify in a timely fashion newly emerging and state-dependent transmission channels of monetary policy, and accurately assess the impact of policy decisions transmitted through these channels. Secondly, the intervention of central banks in the credit or housing market by adjusting policy rates can be optimal, relative to inaction, in circumstances where banks' risk-taking and the preference for housing are overly exuberant.

This dissertation studies the role of sterling during the Bretton Woods period (1944-1971). The Bretton Woods system has often been described as a dollar system with sterling having lost its relevance as reserve currency. However, despite being a secondary reserve currency and having lost importance, sterling was the 'first line of defence for the dollar' as contemporaries put it. They frequently stressed the fact that a sterling crisis would have consequences on the stability of the Bretton Woods system but economic historians have never tested this empirically. This dissertation argues that sterling played an important role in the stability of the international monetary system. Foreign exchange market participants globally monitored sterling and US policymaker stepped in to avoid devaluation of the British currency. US support to sterling was mainly due to the fear of a British devaluation, which could trigger a run on the dollar. When the UK finally devalued the pound in 1967, it marked the beginning of an instable period for the international monetary system. The Gold Pool, a syndicate to defend the US gold parity, collapsed in 1968 and this prefigured the end of the Bretton Woods system. This dissertation presents new data along with novel archival material from seven archives across continents to demonstrate how contagion from sterling to the dollar occurred. Modern econometric methods are used to analyse a new dataset with over 80,000 observations of offshore exchange rates, central bank intervention and reserves. This evidence shows that a secondary reserve currency can still play a key role in the stability of the international monetary system.