| Summary: | The thesis includes three independent essays that investigate the properties of monetary policy rules that modern Central Banks enact in response to different shocks. Chapter 2 considers the changes observed in the policy rules followed by the Bank of England after the financial crisis in 2007. Strong evidence indicates that the linear Taylor rule is not able to capture the behaviour of the Bank of England. Considering three different types of non-linear Taylor rules – in particular, the structural model, the threshold model and the opportunistic model – we obtain robust results showing that the Bank of England has changed its policy priorities after the crisis. In Chapter 3, we compare the endogenous switching rule, in which the weights change according to the macroeconomic conditions, with the “traditional” Taylor rule with fixed weights in the basic New Keynesian model. The results show that although the endogenous-switching rule outperforms the “original” Taylor rule, the economy could benefit from implementing the linear Taylor rule by increasing the weights of inflation and output gap. Chapter 4 evaluates different monetary policy rules in a small open economy. In this framework, there exists an optimal rule which may however be hard to implement in practice. Central Banks may thus consider alternative rules. In order to minimise the welfare loss with respect to the optimal rule, we consider discretionary rules, the Taylor rule and the Taylor rule with real exchange rate, finding that the ranking of welfare performance depends on intratemporal elasticity of substitution and the degree of openness.
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