Thesis advisor: Fabio Ghironi / My dissertation develops a set of tools for introducing heterogeneity into economic models in an analytically tractable way. Many models use the representative agent framework, which greatly simplifies macroeconomic aggregation but abstracts from the heterogeneity we see in the real world. In my research, I move away from the representative agent framework in two key ways. First, my work in international macroeconomics incorporates heterogeneity via idiosyncratic shocks across countries. Second, my work on financial frictions employs asymmetric information between lenders and borrowers. In both of these areas, my goal is to examine the implications of heterogeneity in the most tractable way possible. Crucially, these insights can be incorporated into the models currently used by academics and central banks for policy analysis. The first chapter of my dissertation, "Price Stability in Small Open Economies," joint work with Mikhail Dmitriev, studies the conduct of optimal monetary policy in a continuum of small open economies. We obtain a novel closed-form solution that does not restrict the elasticity of substitution between home and foreign goods to one. Using this global closed-form solution, we give an exact characterization of optimal monetary policy and welfare with and without international policy cooperation. We consider the cases of internationally complete asset markets and financial autarky, producer currency pricing and local currency pricing. Under producer currency pricing, it is always optimal to mimic the flexible-price equilibrium through a policy of price stability. Under local currency pricing, policy should fix the exchange rate. Even though countries have monopoly power, the continuum of small open economies implies that policymakers cannot affect world income. This inability to influence world income removes the incentive to deviate from price stability under producer currency pricing or a fixed exchange rate under local currency pricing, and prevents gains from international monetary cooperation in all cases examined. Our results contrast with those for large open economies, where interactions between home policy and world income drive optimal policy away from price stability or fixed exchange rates, and gains from cooperation are present. The second chapter of my dissertation, "The Optimal Design of a Fiscal Union'', joint work with Mikhail Dmitriev, examines the role of fiscal policy cooperation and financial market integration in an open economy setting, motivated by the recent crisis in the euro area. I show that the optimal design of a fiscal union is governed by the degree of substitutability between the export goods of different countries. When countries produce goods that are imperfect substitutes they should harmonize their income taxes to prevent large terms of trade externalities. On the other hand, when countries produce goods that are close substitutes, they should organize a contingent fiscal transfer scheme to insure against idiosyncratic shocks. The welfare gains from the optimal fiscal union are as high as 5\% of permanent consumption when countries are able to trade safe government bonds, and approach 20\% of permanent consumption when countries lose access to international financial markets. These gains are especially large for countries like Greece that produce highly substitutable export goods and who cannot raise funds on international financial markets to insure against downside risk. The results illustrate why federal currency unions such as the U.S., Canada and Australia, with income tax harmonization and built-in fiscal transfer arrangements, withstand asymmetric shocks across regions much better than the euro area, which lacks these ingredients at the moment. The third chapter of my dissertation, joint work with Mikhail Dmitriev, studies macro-financial linkages and the impact of financial frictions on real economic activity in some of my other work. Beginning with the Bernanke-Gertler-Gilchrist (1999) financial accelerator model, a large literature has shown that financial frictions amplify business cycles. Using this framework, Christiano, Motto and Rostagno (AER, 2013) show that shocks to financial frictions can explain business cycle fluctuations quite well. However, this literature relies on two ad hoc assumptions. When these assumptions are relaxed and agents have access to a broader set of lending contracts, the financial accelerator disappears, and shocks to financial frictions have little to no impact on the economy. In addition, under the ad hoc lending contract inflation targeting eliminates the financial accelerator. These results provide guidance for monetary policymakers and present a puzzle for macroeconomic theory. / Thesis (PhD) — Boston College, 2014. / Submitted to: Boston College. Graduate School of Arts and Sciences. / Discipline: Economics.

The goal of this work is an assessment of the hypothesis whether the fiscal union in euro area can cope with the consequences and causes of the debt crisis. Categorized proposals leading to fiscal union are presented. These proposals are facing problems of moral hazard, perverse incentives, new taxes, inefficient allocation of scarce resources, and general issues of fiscal policy. New steps towards fiscal union will be accepted at the supranational level, some of these steps are more likely than others. The tighter rules, fiscal oversight and regulation the fiscal union will provide, the longer and more successful will be preventing of the crisis in the euro area. Because the euro area cannot be considered an optimal currency area and because the tragedy of the commons problem is observed here, then fiscal union in the long run, along with all the problems of the new proposals will only lead to a deepening of the crisis, or creating a new and much stronger one.

The task was to show on an example of Slovakia, which has accepted the euro, in comparison with V4 countries, which have kept their own currencies, that common currency does not necessarily bring only negatives. Current EMU problems don't come from the nature of euro but the key problem comes from the public finance and irresponsibility of politicians. On the base of this knowledge, the work suggests an alternative approach to solve debt crisis on the example of Greece, meaning a fiscal rent of Greek touristic islands. The work also deals with the vision of EMU in future to avoid this kind of problems and to change the overall approach to fiscal policy. I see a solution in monetary-fiscal union, which is based on the new fiscal rule derived from Okun's law and also on common supervision institution over national government budgets with the right to arbitrarily intervene in case of need.

The thesis evaluates a need of the Fiscal compact measures, its adequacy and impacts on the Eurozone namely based on evaluation of indebtedness of selected member states. The evaluation is carried out by the empirical-analytic research, where the euro zone is analyzed from the perspective of the theory of optimal monetary area, the issue of member countries indebtedness and impacts of indebtedness on the entire euro zone. The thesis also evaluates the existing instruments of fiscal discipline and their deficiencies and new Fiscal compact as an instrument for stabilization and correction. The thesis examines the accuracy of the initial hypothesis that the Fiscal compact as an instrument of fiscal discipline is entirely essential measure of the future euro area functioning. It had been proven that a monetary union can not effectively operate without the long-term fiscal union.

This thesis analyses whether the concept of monetary sovereignty evolves under the impact of globalization and financial integration, and provides a framework for assessing what this implies. Thereby, this thesis contributes to a better understanding of both the contemporary exercise of sovereign powers in monetary and financial matters and of the driving forces behind the evolution of international law in this field. As elaborated in chapter 1, the contemporary concept of monetary sovereignty proposed by this thesis is not static but dynamic in nature. Due to the dual nature of sovereignty as a concept having not only positive but also important normative components, monetary sovereignty cannot become eroded under the impact of legal and economic constraints. Chapter 2 examines the ongoing hybridization of international monetary law arising from changes in the sources of this complex body of law, from the unsuitability of the categories of ‘hard’ and ‘soft’ law for characterizing all normative evolutions in this field, and from the rise of private and transnational monetary law. Chapter 3 scrutinizes the phenomenon of exchange rate misalignment under monetary and trade law. Intrinsically related, it assesses which aspects of the IMF’s legal framework should be reformed in order to tackle contemporary challenges to the stability of the international monetary system, such as global current account imbalances. Chapter 4 analyses the increasing regionalization of monetary sovereignty. It argues that, to the extent that transferring sovereign powers to a monetary union is what provides a state’s population with maximum monetary and financial stability, the underlying transfers are not a surrender of monetary sovereignty, but its effective exercise under the form of cooperative sovereignty. Finally, chapter 5 assesses the implications of the contemporary concept of monetary sovereignty proposed herein for the reorganization of the international financial architecture in the wake of the Great Recession.

The aim of this thesis is to define nominal and real convergence within the area of the European Union and to assess its development on the example of the Czech and Slovak Republics. This dissertation is divided into three integrated sections. The theoretical part analyses basic economic concepts related to the issue of convergence and stability of joint economic units. The topics covered include the Maastricht criteria, their relevance, currentness and possible conflict between nominal and real convergence with the accession of new countries, then the theory of optimum currency area (OCA), theory of endogeneity and exogeneity and the linkage on fiscal policy and fiscal discipline in the environment of the European Union and the eurozone. Special attention is focused on the development of fiscal policy following from the establishment of the Stability and Growth Pact, including its reforms and recent changes in the form of the Euro Plus Pact and the Fiscal Convention. To satisfy the need for quantitative evaluation of given hypotheses, the second (empirical and analytical) part offers two self-constructed indices - the index of real convergence and fiscal discipline index. Based on these indices, relationship between the performance criteria of nominal and the real economy is monitored in the evaluated cohort. The last part of this work is dedicated to synthesis and application of findings from the previous sections upon which conclusions and recommendations for possible entry of the Czech Republic into the euro area are made.