Essays on monetary economics

Abstract

The thesis consists of three chapters:Chapter 2 investigates, in the context of a two-country model with monopolisticcompetition and price stickiness, the implications for macroeconomic stabilityand the welfare properties of three distinct kinds of monetary policy arrangements:(a)cooperative, (b) noncooperative and (c) monetary union. The cooperative firstbest can be achieved if domestic inflation is set equal to zero in both countries atall times. In the non cooperative equilibrium welfare is not maximized due to thepresence of beggar-thy-neighbor policies with the costs of non-cooperation increasingwith the degree of openness of the economy. A monetary unión is welfare-improvingrelative to non cooperation only for countries that have strong trading links.In chapter 3 (co-authored with Katharine Neiss), we investigate the propagationmechanism of monetary shocks in an otherwise standard sticky price model, modifiedto incorporate factor hoarding in the form of variable capital utilisation rates andlabour effort. In contrast, to previous studies, we find that real effects of monetaryshocks can be generated at relatively low degrees of nominal rigidities. Factor hoardingenriches the propagation mechanism, by flattening the marginal cost responsesto monetary shocks. The assumption of labour hoarding is crucial for generatingpersistence, while the assumption of variable capital utihsation allows us to generatereahstic investment volatility without having to introduce capital adjustment costs.Finally, Chapter 4 investigates whether monetary pohcy in a currency area shouldstabilize an aggregate of inflation and output or whether it should take into accountthe dispersion of these variables across regions when the currency area is characterizedby asymmetric shocks across regions and when participation constraints definethe set of feasible policies. We find that even if the two regions are identical, asymmetricshocks might create asymmetric responses of regional variables. Participationconstraints introduce a trade-oíf between eíficiency and incentives in settings withlack of a strong enforcement technology. In order to deal with incentive problems thecentral bank has to manipulate the future consunption paths by adopting a moreexpansionary policy with respect to regional productivity shocks.