Monetary policy effectiveness under regime shifts, the zero lower bound, and the cost channel

Hu, Xueying 2026. Monetary policy effectiveness under regime shifts, the zero lower bound, and the cost channel. PhD Thesis, Cardiff University. Item availability restricted.

Preview	PDF - Accepted Post-Print Version Download (5MB) | Preview
	PDF (Cardiff University Electronic Publication Form) - Supplemental Material Restricted to Repository staff only Download (264kB)

Abstract

This thesis examines how monetary policy should be assessed and designed in environments characterised by rare-disaster risk, regime shifts, and policy constraints. Motivated by the experience of recent crises, we study monetary policy through three linked dimensions: regime-dependent conventional policy, quantitative easing (QE) at the zero lower bound (ZLB), and the supply-side transmission of QE through the cost channel. The thesis examines these issues through three related chapters. Chapter 2 uses a nonlinear Markov-switching DSGE model with rare-disaster risk to compare active and passive monetary policy under different volatility regimes. Chapter 3 extends the analysis to the ZLB and examines how QE supports stabilisation when conventional policy is constrained. Chapter 4 introduces a cost channel into a four-equation New Keynesian model to examine the supply-side effects of QE on inflation dynamics, macroeconomic stabilisation, and optimal policy design. The findings show that monetary policy in crisis is state-dependent. Under conventional policy, active regimes generally stabilise inflation more effectively, support stronger macroeconomic adjustment, and deliver higher welfare than passive regimes, particularly in high-volatility and disaster-prone environments. When the ZLB binds, QE provides meaningful stabilisation and can serve as a credible substitute for conventional policy, although its effectiveness continues to depend on the underlying policy regime. The analysis further shows that when a cost channel is present, monetary policy affects inflation through both demand and supply-side channels, which can amplify fluctuations and help explain muted inflation during prolonged QE. In this setting, access to QE as an additional instrument can substantially reduce welfare losses. Overall, the thesis provides a unified perspective on monetary policy by linking rare disaster risk, regime-dependent policy, the ZLB, QE, and the cost channel, while applying nonlinear methods suited to tail-risk environments and the ZLB. It further shows that monetary policy effectiveness depends on the state of the economy, the instrument used, and the transmission channel through which policy operates.

Item Type:	Thesis (PhD)
Date Type:	Completion
Status:	Unpublished
Schools:	Schools > Business (Including Economics)
Subjects:	H Social Sciences > H Social Sciences (General)
Uncontrolled Keywords:	1. Rare disaster 2. MS-DSGE 3. monetary policy 4. Quantitative easing (QE) 5. Zero lower bound (ZLB) 6. Cost channel
Date of First Compliant Deposit:	28 October 2026
Last Modified:	29 Oct 2026 10:28
URI:	https://orca.cardiff.ac.uk/id/eprint/190483

Actions (repository staff only)

Edit Item