Essays on monetary policy and the European Monetary Union ; Essays über Geldpolitik und die Europäische Währungsunion
The thesis consists of four essays of independent interest which make theoretical and empirical contributions to the fields of monetary economics and economic integration. The first essay studies the implications of measurement bias in inflation for the conduct of monetary policy. In a business cycle model with product entry and a stabilization role for monetary policy, measurement bias in inflation originates from a failure of the statistical authority to account for new products in time. Measurement bias depends systematically on the state of the business cycle and dampens inflation volatility but increases inflation persistence. If not accounted for by monetary policy, inflation mismeasurement results in too little inflation stabilization. The second essay points to a tension between stylized facts and the standard monetary model concerning money demand. Whereas the evidence for dynamic money demand is overwhelming, money demand in the standard model remains static. I reconcile the standard model with dynamic money demand and revisit the optimal monetary policy problem in the modified model. Even though dynamic money demand implies that money matters a lot for social welfare, monetary policy should pay little attention to money. This result relates to the ongoing debate on the monetary policy strategy of the European Central Bank. The third essay considers the catch up process of new European Union (EU) member states. New EU member states experience real exchange rate appreciation and, at the same time, terms of trade which improve vis ´a vis the euro area. Whereas the two-country two-goods real business cycle model cannot explain both facts simultaneously, I show that it can once one accounts for endogenous product variety. This finding suggests that the fundamental driving force behind the sustainable catch up process in new EU member states is a form of productivity which boosts product variety rather than product quantity. Essay number four empirically uncovers the effect of the common European currency ...