Macroeconomic dynamics of monetary unions : a theoretical and empirical approach

This thesis looks into the "inner workings" of monetary unions, from the perspective of asymmetry, direct spillovers and microeconomic foundations, i.e. how the macroeconomic dynamics of prices, costs and production of one country influence these magnitudes in other countries, under the premise of sharing a currency and thus monetary policy.
The first chapter gives an overview of the problem of economic interconnectedness in monetary unions, i.e. when nominal interest rates are the same for all members and nominal exchange rates are unavailable to smooth out idiosyncratic shocks. This problem can be operationalised using the (New Keynesian) Phillips Curve.
Chapter 2 investigates empirically how the common monetary policy of the ECB influenced the inflation dynamics in six member countries of the Euro area. Estimating country-wise New Phillips curves for three periods, pre-crisis, crisis and "Whatever-It-Takes" we can pin down the effects of both the crisis and the ECB’s monetary policy response on the macroeconomic developments in Europe. The results from these estimations varied strongly across the countries in the sample, showing that it is inappropriate to treat an MU as a big monolithic bloc instead of a set of interacting economies.
Chapter 3 develops theoretically a two-country, monetary union New-Keynesian Model, augmenting the familiar New-Keynesian Phillips Curve and the Dynamic IS Cuve with an additional term, the spillover from the other country. A simulation study then investigates how the price and production dynamics of the countries in such a union react to various common and idiosyncratic shocks. Like in the literature, for an MU idiosyncratic shocks are more difficult to deal with than common shocks, however may be not as difficult as previously thought, because the spillovers introduce a certain degree of pro-cyclicality thus reducing the transmission asymmetry.
In chapter 4 this model is then estimated using data for Germany and France, and the US census regions North-East and South. The main finding is that, at least for Europe, the usual magnitudes of the parameters can be reproduced alongside a very plausible estimate for the measures of economic interconnectedness or the degree of spillovers. However, the model works less well for the US, suggesting that the European Monetary Union is fundamentally different from the US.
This thesis provides a theoretical and empirical framework to discuss and debate economic policies in the context of a monetary union like in Europe, i.e. a set of highly interconnected economies with various nominal rigidities.