ESSAYS ON MONETARY POLICY AND CYCLICAL CONVERGENCE IN THE EURO AREA

This work contributes to the literature about the Euro-area monetary policy analysing the effects of unconventional measures, the conduct of monetary policy by the European central bank and the effects of the crisis on the economic structures of member countries. The first chapter deals with the effects of unconventional monetary policy measures implemented since 2007 to cope with the financial and sovereign debt crisis. The focus is on government bond yields as they as they became the direct expression of the sovereign debt crisis in the Euro area, and it deals with two aspects of the transmission mechanism: the first one is the expectational channel and the second one is the effect of liquidity injections. Results show that the effect of unconventional monetary policies are not unique inside the monetary union but vary across countries and over time. In particular, the unfolding of the European sovereign debt crisis completely changed the impact of liquidity injections as they led to a rise in interest rate spreads for highly indebted countries. The second chapter analyzes the conduct of monetary policy in the Euro area over the period 1999-2013 by estimating several monetary policy reaction functions with time-varying coefficients and heteroskedastic error terms. This allows to evaluate whether relevant shifts in the conduct of monetary policy occurred and whether the current financial crisis had an influence on that. Results show that the sensitivity of the ECB towards inflation and output gap changed along the time span and mainly after 2008 as it also started to respond to new variables like bank loans and sovereign bond yield spreads. The third chapter analyzes the effects of the recent economic crisis in the Euro area in light of international structural macroeconomic relationships. This is achieved through a conditional forecast exercise. By comparing the forecast with the actual path of the Euro-area variables it is possible to evaluate whether, given the effects of the crisis in US, pre-crisis structural macroeconomic relationship are able to explain Euro-area economic developments during the crisis. Results show that the effects of the crisis have been much more heterogeneous than what implied by structural relationships and the crisis shock suggesting that either a structural break or a strong idiosyncratic shock affected the Euro area after 2008. Finally, the sovereign debt crisis by itself seems not to be able to explain neither business-cycle and inflation heterogeneity, nor the recent recession and economic slack.