Working Paper Series

The Berlin Doctoral Program in Economics and Management Science periodically publishes working papers that highlight the findings of its research. They are also linked on RePec.

Unconventional Monetary Policy in a Monetary Union

by Johanna Krenz

I analyze the adoption of unconventional monetary policy measures in a monetary union. To this end, I lay out a two-country monetary union model with balance-sheet constrained financial intermediaries and central bank credit policy. The framework is used to compare the welfare implications of union-wide versus country-specific optimal simple unconventional monetary policy rules. It is shown that – despite the presence of country-specific shocks – country-specific rules are not necessarily associated with higher welfare from the viewpoint of a structurally symmetric union. Instead, to the extent that the central bank reacts to indicators which are highly correlated between countries, union-wide rules can be preferable. When considering structural asymmetries between countries, it is found that, under some of the policy rules considered, a financially less stable country benefits more from the introduction of unconventional policy than a more stable one. This may, however, limit incentives to reform financial structures.

BDPEMS Working Paper Series # 2018-01