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