Modern challenges to monetary policy

The decade following the Financial Crisis of 2008-09 has highlighted that monetary policy faces several challenges. This thesis aims to identifying and better understanding four such modern challenges to monetary policy.
The first challenge, identified in Chapter 1, is particular to monetary unions and arises if households largely base their expectations on domestic variables, and less so on foreign. We show that such a home bias creates cross-country heterogeneity in expectations and causes country-specific disturbances to generate larger and more prolonged macroeconomic imbalances.
The second challenge, which is central to Chapter 2, concerns the effects of central bank forward guidance. Different from the common literature, this chapter explicitly allows for imperfect and endogenous central bank credibility when studying the effects of forward guidance by assuming that private agents are boundedly rational.
The third challenge lies in the vulnerability of open economies to sudden shifts in cross-border capital flows as highlighted by the euro area sovereign debt crisis. In Chapter 3, we show novel empirical evidence of the transmission of such country-risk premium shocks. Using a structural model, we further aim to answer the normative question of whether capital controls can mitigate their negative effects.
The fourth challenge to monetary policy discussed in this thesis arises from the protracted decline in interest rates across developed economies since the 1980s. In Chapter 4, we show that this observed decline in yields appears more due to a fall in equilibrium interest rates and less to a decline in term premia than typically reported.