Essays on monetary economics

Abstract

The thesis consists of three chapters: Chapter 2 investigates, in the context of a two-country model with monopolistic competition and price stickiness, the implications for macroeconomic stability and the welfare properties of three distinct kinds of monetary policy arrangements: (a)cooperative, (b) noncooperative and (c) monetary union. The cooperative first best can be achieved if domestic inflation is set equal to zero in both countries at all times. In the non cooperative equilibrium welfare is not maximized due to the presence of beggar-thy-neighbor policies with the costs of non-cooperation increasing with the degree of openness of the economy. A monetary unión is welfare-improving relative to non cooperation only for countries that have strong trading links. In chapter 3 (co-authored with Katharine Neiss), we investigate the propagation mechanism of monetary shocks in an otherwise standard sticky price model, modified to incorporate factor hoarding in the form of variable capital utilisation rates and labour effort. In contrast, to previous studies, we find that real effects of monetary shocks can be generated at relatively low degrees of nominal rigidities. Factor hoarding enriches the propagation mechanism, by flattening the marginal cost responses to monetary shocks. The assumption of labour hoarding is crucial for generating persistence, while the assumption of variable capital utihsation allows us to generate reahstic investment volatility without having to introduce capital adjustment costs. Finally, Chapter 4 investigates whether monetary pohcy in a currency area should stabilize an aggregate of inflation and output or whether it should take into account the dispersion of these variables across regions when the currency area is characterized by asymmetric shocks across regions and when participation constraints define the set of feasible policies. We find that even if the two regions are identical, asymmetric shocks might create asymmetric responses of regional variables. Participation constraints introduce a trade-oíf between eíficiency and incentives in settings with lack of a strong enforcement technology. In order to deal with incentive problems the central bank has to manipulate the future consunption paths by adopting a more expansionary policy with respect to regional productivity shocks.