Parasal birlikler üstüne denemeler

This dissertation is composed of three chapters. The first chapter focuses on the derivation of an appropriate objective welfare function to compare monetary policies across different monetary regimes using the Linear Quadratic (LQ) Approach. Benigno & Benigno (2006) offers a method to derive quadratic welfare criteria for policy analysis using LQ Approach. The welfare criteria derived using this method ranks monetary policies accurately in a monetary regime. However, it does not necessarily provide accurate ranking of monetary policies across different regimes, namely, the flexible exchange rate regime, the cooperative flexible exchange rate regime, and the monetary union. Yet, choosing a monetary regime is as important as choosing the optimal monetary policy in a monetary regime. This chapter shows that Benigno & Benigno (2006)'s method can also compare policies across these regimes if it is assumed that the economy is in a steady state in the initial period. This assumption is equivalent to assuming that the monetary regime choice is announced one period in prior when the economy is in a steady state. Considering the fact that monetary regime changes are well communicated, this assumption remains fairly weak. The second chapter studies the monetary regime choice between the monetary union and the flexible exchange rate regime in a large open economy framework. The classical approach argues that a monetary union should be established between countries with similar shocks so that the cost of the one-size-fits-all monetary policy is minimized. This chapter reveals that if there are inefficient shocks (i.e. shocks which create trade offs between output and inflation stabilization) and countries are large enough to affect each other, then the relative variance (mean preserving spread) of inefficient shocks should also be considered in the monetary regime choice. A country should choose the monetary union over the flexible exchange rate regime only if the variance of foreign inefficient shocks is close to or larger than the variance of domestic inefficient shocks. This is on the condition that losing exchange rate flexibility has little or no cost. By joining a monetary union, a country ``ties the hand of the other" countries joining the same union: it prevents welfare decreasing foreign monetary policy responses to foreign inefficient shocks. A monetary union is a Pareto Improvement only if the variances of member countries' inefficient shocks are close enough. The third chapter continues to investigate the incentive to join a monetary union to ``tie the hand of the others". It studies the effects of the price rigidity and the trade elasticity on this incentive and the monetary regime choice between the flexible exchange rate regime and the monetary union. It finds that welfare gain from ``tying the hand of the other" country decreases as prices become more flexible because more flexible prices compensate shocks and the exchange rate inertia better. The national welfare cost of variation of the foreign output gap in the flexible exchange rate regime increases sharply with stickier prices. This increases the incentive to join the monetary union in order to ``tie the hand of the other" country. Chapter 3 also concludes that under symmetric parameters and shocks, the need to ``tie the hand of the other" country soars as the trade elasticity increases. However, if the trade elasticity is low, then welfare cost of losing the exchange rate flexibility may dominate welfare gain from ``tying the hand of the other". Consequently, given a level of price rigidity, if the trade elasticity is low, then it is likely that a country prefers the flexible exchange rate regime over the monetary union. If the trade elasticity is high, then the monetary union dominates the flexible exchange rate regime.