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Abstract

In the past decade, central banks worldwide started to face new challenges: Rather than preventing too high inflation rates, monetary policy makers started to worry about too low inflation. Very low and even negative policy rates and large balance sheet expansion together with unconventional monetary policies were necessary to achieve price stability. This thesis addresses these new challenges by analyzing how wage rigidity affects the real economy in a deflationary environment. Base wages in Switzerland exhibit a substantial degree of rigidity, which has negative consequences on income and employment – despite a comparably flexible labour market. It further investigates the impact of the ECB’s Public Sector Purchase Programme (PSPP) on bank lending and to employment and investment outcomes of small companies. The PSPP improved credit access of small firms and positively affected the real economy. Especially firms in the periphery of the euro area benefitted from the PSPP. The final chapter focuses on the interplay of low interest rates and the Swiss housing market, how it changed over time and region. Most of house price variation can be explained by fundamentals such as demand and supply for housing or GDP growth. Apartment prices got more sensitive to mortgage rate changes during the recent house price boom and there is substantial heterogeneity across Swiss regions. The thesis contributes to the understanding of the transmission channels and possible side effects of central banks’ unconventional monetary policies and discusses how higher inflation targets can prevent binding wage rigidities and negative consequences for the real economy.

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