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.

The purpose of this thesis is to empirically explore the characteristics of the monetary transmission mechanism, with a particular emphasis on the role of banks, in Turkey. By looking at the banking sector at the micro level and exploiting dynamic panel data modeling approaches, the heterogeneity in banks&rsquo / response in terms of their lending and risk-taking to changes in policy interest rates is analyzed. The first essay is an empirical analysis of the bank lending channel of monetary transmission. In this regard, the lending behavior of banks operating over the period 1988-2009 is examined. Given the changes in the policy stance and developments in the financial system following the 2000-01 crisis, the analysis is further conducted for the two sub-periods: 1988-2001 and 2002 2009, to examine whether there is a change in the functioning of the credit channel. Empirical evidence suggests cross sectional heterogeneity in banks&rsquo / response to monetary policy changes during 1988-2009. Regarding the results of the pre-crisis and post-crisis periods, it is found that an operative bank lending channel existed in 1988-2001, however its impact became much stronger thereafter. Furthermore, there are significant differences in the distributional effects due to bank specific characteristics in the impact of monetary policy on credit supply between the two sub-periods. The second essay investigates the existence of risk-taking channel of monetary policy by using quarterly data over the period 2002-2012. Four alternative risk measures are used in the analysis / three accounting-based risk indicators and a market-based indicator. Our findings show that low levels of interest rates have a positive impact of banks&rsquo / risk-taking behavior for all risk measures. In terms of bank specific characteristics, our results imply that large, liquid and well-capitalized banks are less prone to risk-taking.

This survey systematizes the rapidly growing literature on the influence of monetary policy and macroprudential policy on the macroeconomy. It examines the impact of monetary policy on the financial cycle and asks how macroprudential instruments influence the efficiency of monetary policy. The questions of whether monetary policy should take account of the financial cycle and lean against the wind is also addressed. The literature review shows that monetary policy is not neutral for financial stability, but should not take into account the financial cycle because the costs probably outweigh the benefits.

La conduite des politiques économiques a été mise en question après le déclenchement de la crise financière en 2007. Cette thèse analyse les faiblesses identifiées dans la réglementation existante avant la crise et propose des pistes d’amélioration. Le premier chapitre s’intéresse à l’existence du canal de la prise de risque en zone euro. Parle biais des mesures de causalité de long terme, nous démontrons que la politique monétaire a une influence sur le niveau de risque financier. Un autre constat tiré de cette analyse concerne l’absence des mesures de risque systémique.Par conséquent, le deuxième chapitre étudie les mesures proposées après la crise pour les institutions financières et les applique aux États membres de la zone euro. A l’aide de ces mesures, les autorités pourront imposer des règles plus strictes aux pays les plus risqués d’un point de vue systémique. Le chapitre trois envisage une première solution visant à atténuer l’effet des décisions monétaires sur le risque. Nous étudions, à travers un modèle DSGE, l’impact de la stratégie de “leaning against the wind” sur les cycles économiques et financiers. Les résultats montrent qu’unetelle approche n’est pas suffisante pour stabiliser l’économie et que des arbitrages entre objectifs apparaissent. Pour cette raison, le dernier chapitre porte plus en détail sur les arbitrages entre objectifs, et propose, comme une deuxième solution, l’intégration des mesures macroprudentielles dans l’analyse. En utilisant un modèle Néo-Keynésien sous forme réduite, nous trouvons que les fonds propres contracycliques aident à réduire la volatilité des cycles, mais que les trade-offs demeurent en cas de chocs financiers. Le rôle de la banque centrale dans le maintien de la stabilité financière s’avère aussi important, puisque l’utilisation du leaning against the wind semble améliorer la volatilité des cycles. / The conduct of economic policy has been called into question after the outbreak of the financial crisis in2007. This thesis analyzes the flaws identified in the regulation enforced before the crisis and offers suggestionsfor improvement. The first chapter focuses on the existence of the risk-taking channel in the Eurozone. Throughmeasures of long-term causality, we demonstrate that monetary policy influences the level of financial risk. Anotherconclusion drawn from this analysis is the absence of systemic risk measures. Therefore, the second chapter analyzesthe measures proposed after the crisis for financial institutions and applies them to members of the Eurozone. Basedon these measures, authorities may impose stricter rules on countries that prove to be systemically risky. Chapterthree considers a first solution to mitigate the effect of monetary policy decisions on risk. We study, through a DSGEmodel, the impact of the "leaning against the wind" strategy on economic and financial cycles. The results show thatthis approach is not sufficient to stabilize the economy and that it gives rise to trade-offs between objectives. For thisreason, the last chapter examines in more detail the trade-offs between objectives, and proposes as second solution,the integration of macroprudential measures in the analysis. Using a reduced form New-Keynesian model, we find thatcountercyclical capital helps to reduce the volatility of cycles, but trade-offs appear in case of financial shocks. Therole of the central bank in maintaining financial stability seems also important, as the use of leaning against the windimproves cycles’ volatility.

In questa tesi si sostiene che il meccanismo di trasmissione della politica monetaria nasconde un canale di trasmissione del rischio, e che una politica monetaria espansiva non solo aumenta l’offerta di credito ma anche la propensione delle banche a prendere rischio. I modelli macroeconomici esistenti non sono adatti ad identificare questo meccahismo, visto che o non incorporano un settore bancario, oppure si concentrano sull’amplificazione finanziaria dopo una crisi piuttosto che sulla presa del rischio prima delle crisi. La tesi propone un semplice modello in cui il rischio di credito e di insolvenza e’ modellato endogenamente. Il modello mostra l’esistenza di un trade-off tra quantita’ e qualita’ del credito, il che puo’ avere importanti ripercussioni per la gestione della politica monetaria. Successivamente, la tesi sviluppa un paper empirico e di policy che studia la leva finanziaria delle banche. Si sostiene che le misure tradizionali della leva non possono mostrare un importante peggioramento della qualita’ del capitale delle banche prima della crisi del 2007. Si mostra che la qualita’ di tale capitale e’ progressivamente peggiorata prima della crisi, in particolar modo per le banche commerciali. Viene proposta una misura alternativa della leva finanziaria. / This dissertation argues that the transmission mechanism of monetary policy hides a risk taking channel, as loose monetary policy not only increases credit supply but also increases the propensity of banks to take risks. The existing macroeconomic models are ill-designed to identify the forces of this mechanism, as these models either do not have an explicit banking sector, or they focus on ex-post amplification mechanism rather than ex-ante bank risk taking. A simple model is developed, where credit and solvency risk is determined endogenously. The model shows that a trade-off exists between credit quality and credit quantity, and this trade off impacts on the effectiveness of monetary policy. Subsequently, the dissertation develops an empirical, policy paper that investigates banks leverage ratios. It is argued that traditional measures of leverage cannot detect an important decline in bank capital quality before the 2007 crisis. The dissertation shows that capital quality has declined progressively before the 2007 crisis, particularly for commercial banks. A new leverage ratio is proposed.