Notwithstanding the proven achievements of the New-Keynesian research programme, the models currently used for monetary policy analysis rely on two assumptions that are often taken for granted. One is the balanced growth path property, which has generally been an accurate description of the US and other advanced economies. The other assumption concerns the small volatility of shocks that enables the researcher to approximate the solution of the original model locally. In the past decade, however, emerging economies such as China, Brazil, the Czech Republic or Poland have experienced persistent growth rates of GDP per capita that have been well above the corresponding levels in the euro area or the US. But how should monetary policy respond to an ongoing real convergence process which precisely differentiates emerging from advanced economies? The first part of the thesis aims to answer this question in the context of economies also bound to become future members of the euro area. Owing to the long-term institutional commitment to satisfy the Maastricht convergence criteria during the ERM-II mechanism, policy makers in Central Europe face the additional responsibility of managing the tension between nominal and real convergence. For instance, the Balassa-Samuelson hypothesis postulates an empirically relevant reason as to why countries engaged in a catching-up process might experience a higher inflation rate brought about by the increase in the relative price of services. Motivated by the stylised facts of macroeconomic dynamics in the Czech Republic, a country we take as representative for the whole region, Chapter 1 develops a stylised SOE model with nominal rigidities that is subject to asymmetric productivity growth shocks affecting the traded and nontraded sectors. Relative to the existing literature analysing optimal monetary policy under commitment in Balassa-Samuelson type of macroeconomic environments, the model we propose differentiates itself in that it allows for endogenous current account fluctuations and uncorrected steady state distortions. These modifications result in richer dynamics, which are shaped by the possibility to influence the terms of trade in one’s favour and the presence of monopoly power in product markets. In setting up the welfare maximising interest rate responses, the optimal plan trades off conflicting inflationary and deflationary incentives stemming from the existence of the above externalities. Whereas the first chapter focuses on the methods and assumptions needed to detrend the nonstationary model, the second chapter examines the optimal monetary policy stance under real convergence in two different market structures. The simulations reveal that the specific policy recommendations depend on the degree of substitutability between domestic and foreign goods, a parameter which also alters the strength of the wealth effects driving consumption responses. When monopolistic competition in the traded sector is assumed, the Ramsey interest rate plan is countercyclical. Owing to a cancellation of the terms of trade externality, the predictions are however reversed under perfect competition. This is because the incentive to stimulate production away from the inefficient steady state level becomes dominant. Additionally, the study conducts an extensive welfare analysis through which the effectiveness of inflation targeting and exchange rate peg regimes is assessed relative to the Ramsey plan. It is shown that policies achieving appropriate measures of price stability robustly deliver higher conditional welfare during a catching-up process. The analysis is suggestively complemented with policy experiments that are relevant to the ERM-II period, such as the Maastricht constrained optimal plan, its welfare costs and the welfare-maximising choice of a central parity at which the nominal exchange rate should be fixed. The final part of the thesis examines the macroeconomic costs of euro adoption in Emerging Europe, conditional on the EMU membership eventuality. Inspired from the Optimum Currency Areas literature, the research conducted in the third chapter investigates the circumstances when the decisions made by the ECB would correspond to the domestic optimal interest rate responses. The empirical work looks at the structural alignment and the degree of business cycle synchronisation between prospective and current members of the single currency area, modelled suggestively as the Czech and Austrian economies. A rich SOE model with incomplete markets and trade in intermediate inputs is developed in this sense, whose core structure is similar to Kollmann (2001). Relative to the original framework, we augment its shock structure and enrich the dynamics by incorporating external habit formation and partial indexation in the Calvo adjustment rules for prices and wages. The state-space representation of the DSGE model is taken to data and the set of random parameters is estimated using Bayesian techniques. The comparative analysis reveals that most structural parameters are not very far from each other, suggesting that a moderate degree of structural convergence has been achieved by the emerging economy. The costs of losing monetary policy sovereignty are further assessed by employing a battery of tests, which include impulse response analyses and historical decompositions of output and inflation. While confirming previous SVAR evidence, the results suggest that the propagation mechanisms of monetary policy, productivity and demand shocks are remarkably similar across the two economies. In contrast, the analysis also indicates considerable asymmetries of the sources of fluctuations, which were more volatile and largely idiosyncratic in the Czech Republic. The low degree of business cycle synchronisation suggests that coping with euro area interest rates on a permanent basis is likely to be painful.
| Identifer | oai:union.ndltd.org:bl.uk/oai:ethos.bl.uk:601577 |
| Date | January 2014 |
| Creators | Barnaure, Vlad-Victor |
| Publisher | University of Glasgow |
| Source Sets | Ethos UK |
| Detected Language | English |
| Type | Electronic Thesis or Dissertation |
| Source | http://theses.gla.ac.uk/5036/ |
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