Dr Stylianos Tsiaras

This thesis is a collection of three independent chapters accompanied by an introductory chapter motivated by two recent economic developments: the unconventional monetary policies in the Euro Area and the Greek crisis. Chapter 1 is an introductory chapter; it outlines the ECB's response to the recent financial crisis, the main events of the Greek crisis that followed and provides a brief literature review on the dynamic stochastic general equilibrium (DSGE) models with financial frictions, the class of models employed in this thesis. Chapter 2, the main chapter of the thesis, examines the post-2008 European Central Bank's liquidity enhancing policies and provides evidence of risk-taking incentives of monetary policy. The chapter's main result, using a novel DSGE model with financial frictions on the supply and the demand side of credit, is that when the central bank supplies liquidity during turbulent times, banks grant loans to riskier firms and this consequently has a negative impact on the performance of the economy. Chapter 3 examines the impact of quantitative easing in a restricted financial participation economy with financial frictions on two aspects: on household inequality and QE's effect on aggregate demand in a low financial inclusion environment. I find that government bond purchases increase aggregate demand and through the earning heterogeneity channel this leads to a reduction of consumption and income inequality. I also show that in an economy with a low degree of financial inclusion, QE might have contractionary effects. Chapter 4 shows that the Greek Recession lies in the category of Great Depressions defined by Kehoe and Prescott. By using the Bernanke, Gertler and Gilchrist (1999) model and also the neoclassical growth model calibrated to the Greek data, the TFP is acknowledged as the main source of fluctuations during the Greek Recession.