The Uncertainty Channel of Monetary Policy, 2024
Working paper

Abstract: I study a novel channel of monetary policy that alters the effects of exogenous disturbances on the economy and may be effectively utilized by central banks for macroeconomic stabilization. The uncertainty chanel works opposite to the signaling channel of monetary policy by inducing uncertainty about the realization of disturbances and reducing their macroeconomic effects. Using a dispersed information New Keynesian model, I show that the central bank can decrease the informativeness of its actions and increase uncertainty about inefficient shocks by systematically deviating from its policy rule. I find that optimal monetary policy is characterized by the presence of a monetary policy shock in the policy rule with a unique optimal variance that maximizes social welfare. I also find different effects of monetary shocks under high versus low volatility regimes in the US economy, consistent with this novel channel of monetary policy.

Country Portfolios and Optimal Monetary Policy, 2024
Working paper

Abstract: In a world with rising financial globalization, exchange rate fluctuations play an increasingly important role in determining asset returns, thereby strengthening the exchange rate channel of monetary policy. Motivated by this premise, I study the optimal monetary policy regime in a small open economy in relation to its portfolio structure. I show that the optimal policy deviates from price stability by inducing optimal co-movement of domestic and foreign inflation, thus providing insurance against foreign shocks. Moreover, the optimal policy strategy and the exchange rate regime depend on the structure of country portfolios and openness and thus imply positive or negative co-movements between domestic and foreign variables. Nevertheless, in either case, the optimal policy framework promotes higher welfare than inflation targeting or an exchange rate peg.

Estimation and Inference of Asymmetric Impulse Response Functions, 2024
Working paper

Abstract: In this paper, I study asymmetric moving average processes and provide a theory for such processes, their properties, and conditions for convergence, stationarity, etc. I also propose a simple 2-step least squares procedure for estimating asymmetric impulse response functions by local projections. Then, I generalize the estimation method to vector asymmetric moving average processes and show that asymmetric impulse response functions may be estimated using the proposed methodology. Finally, the Monte Carlo analysis validates the proposed method with satisfactory performance in both small and large samples.

Monetary Policy in an Open Economy: The Role of Financial Dollarization, 2017
Working paper

Abstract: This paper extends the Gerali et al. (2010) model to an open economy framework with dual-currency banking and endogenously determined dollarization. The model incorporates a portfolio allocation problem in households and entrepreneurs' decisions, so that they choose optimal currency structure of their deposits and loans based on interest rate differentials and their expectations about exchange rate movements. The optimal structure of deposit and loan portfolios yields in disparate dollarization rates. The model is estimated for Armenia using the data from 2004 to 2015. The comparison of models with and without dollarization reveals significant differences in macroeconomic effects of monetary policy in dollarized economies, since it primarily affects the economic activity by exchange rate channel, rather than by interest rate channel. Also we find that partial dollarization is welfare increasing and inflation stabilization can be achieved with lower welfare costs in dollarized economies.