Essays in international monetary economics

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Abstract

This dissertation presents two essays in international monetary economics; the unifying theme is the international dimension of monetary policy. I investigate two issues related to the openness of the economy: (i) the implications of external positions for the conduct of macroeconomic stabilisation policy; (ii) the consequences of monetary unification for social welfare under incomplete international markets. The former subject occupies chapter one; the latter occupies chapter two. In the first chapter, "Monetary policy and wealth effects with external positions", I develop a two-country DSGE model to study how financial integration affects the international transmission of shocks and the conduct of monetary policy. If the households of each country receive dividends from foreign firms, macroeconomic disturbances are followed by international wealth effects that transfer consumption across countries. The direction of these effects varies across different types of shocks, as these imply different comovements of macroeconomic variables. As a consequence, the choice of the monetary policy mix is shown to rest on the relative importance of different sources of uncertainty.

In the second chapter, "Monetary policy and welfare in a currency union", I explore the welfare cost of abandoning an independent monetary policy to join a currency union, and I investigate what trade gains can outweigh this loss. The consequences of subjecting distinct economies to a single monetary authority are investigated in the context of an open-economy DSGE model with country-specific macroeconomic shocks and incomplete international markets. The dependence of the cost of adopting a single currency on the international synchronisation of business cycles is examined first. Next, the welfare implications of international price misalignments and monetary barriers to trade with separate currencies are considered. Finally, the model is estimated with data from Italy, France, Germany and Spain using standard Bayesian tools. Moderate trade frictions are found to be sufficient for a monetary union to guarantee the same welfare as a regime with national currencies. Under a calibration of these frictions in line with the literature, monetary unification is found to offer positive net welfare gains to all these economies.

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