貨幣同盟的三個議題 - 政大學術集成

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(1)國立政治大學經濟學系研究所博士學位論文. 貨幣同盟的三個議題 Three Essays Union 治政on Monetary. 立. 大. ‧. ‧ 國. 學 sit. y. Nat. n. al. er. io. 指導教授：賴景昌教授. v i n C h 黃俞寧 U副教授 engchi. 研究生：劉世夫撰. 中華民國一百零六年七月.

(2) 謝詞感謝我的指導教授. 賴景昌老師及. 黃俞寧老師。在漫長的博士生涯中，兩位長師對我. 的影響不只於知識方面的傳授，也嚴格地訓練我對學術研究的嚴謹態度與敏銳度，而老師們於教學上的高標準及待人處事原則，皆為我樹立了良好的典範，點點滴滴無不對我產生潛移默化的影響，更是我人生中最重要的全面性改變。在我求學期間更感謝老師們提供了良好的研究環境與充足資源，我得以無後顧之憂順利完成論文撰寫。感謝我的口試委員. 洪福聲老師、. 唐震宏老師與. 蕭明福老師，於百忙之中願意抽空. 審閱我的論文，除了指正疏漏更予許多寶貴的建議，令我的論文趨於完整，在此特別致謝。我也非常感謝. 方中柔老師與. 政治大. 李文傑老師在學校亦師亦友的提攜與照顧。感謝這一路上幫. 立. 助我和鼓勵我的朋友們，志興學長、朱巡、冠任、振維、平河、學宏、中原、偉奇、玫英以. ‧ 國. 學. 及立文，你們的加油與打氣為這段博士生涯增添許多美好的色彩。. 謝謝爸爸、媽媽及哥哥們，家裡因為有你們充滿了溫暖，回到家總是讓我心情放鬆，將. ‧. 煩惱拋諸腦後，最後，感謝名梅的支持及陪伴，生命因為你們更加美好，在此將論文獻給你. n. al. er. io. sit. y. Nat. 們。. Ch. engchi. i n U. v. 劉世夫 2017 年 7 月. i.

(3) 摘要自從 2008 年全球經濟衰退以來，歐元區經濟顯著的衰退，特別是歐元區各成員國的經濟表現有明顯的差異。在本文中，我們試就成員國「貿易開放程度」和「財政基本面」這兩個重要特徵，來詮釋歐元區經濟穩定這個議題。在第二章中，我們在貿易開放程度不同的國家下，比較貨幣同盟制度與浮動匯率制度對於負向衝擊產生的影響。我們發現當貨幣當局愈重視產出穩定時，相較於浮動匯率制度，貨幣同盟制度將使產出下降的更多。在第三章中，我們將短期私人債券及長期政府債券引入貨幣同盟的兩國 DSGE 模型。我們推斷，歐洲央行(ECB) 的公共部門債券購買計劃(PSPP)，對於不同財政狀況的成員國，有著不對稱的總體經濟影響。. 政治大. 在第四章中，我們建立貨幣同盟經濟的最適貨幣政策模型。我們發現成員國間經濟差異，將. 立. 影響貨幣同盟的整體福利水準。相較於傳統零利率最適貨幣政策文獻，本研究的結果顯示不. ‧. ‧ 國. 學. 論是權衡或承諾制度，增加公共部門債券購買將緩和貨幣同盟的經濟波動。. n. er. io. sit. y. Nat. al. Ch. engchi. ii. i n U. v.

(4) Abstract Since the global recession in 2008, the economic performance of the Euro area has declined significantly.. In particular, there have been great differences in the economic performance among. member states in the Euro area. In this dissertation, we attempt to address the issue of economic stability by focusing on two key features: the trade openness and the fiscal fundamentals among member states. In Chapter 2, we compare the impacts of the adverse shocks on countries with different degrees of openness under the monetary union regime, and our finding shows that the monetary union will result in a greater decline in output if the monetary authority attaches a higher. 政治大. weight to output stabilization. In Chapter 3, we build a two-country DSGE model representing a. 立. monetary union with both short-term and long-term government bonds.. We deduce that the ECB’s. ‧ 國. 學. public sector purchase programme (PSPP) has asymmetric macroeconomic effects on member states under different fiscal fundamentals.. In Chapter 4, we set up an optimal monetary policy. ‧. We find that the differences in the economic performance of Comparing our results with. sit. Nat. individual member states will influence the union-wide welfare.. y. model of a monetary union.. n. al. er. io. classical literature of optimal monetary policy at zero lower bound, by adding the PSPP, our study. v. indeed reflects lower volatility of the union-wide economy under either discretion or commitment.. Ch. engchi. iii. i n U.

(5) Contents Chapter 1 Introduction .................................................................................................................. 1 References ................................................................................................................................... 6 Chapter 2 Internal Imbalances in the Monetary Union with Asymmetric Openness ............. 7 2.1 Introduction ........................................................................................................................ 7 2.2 The Model .........................................................................................................................11. 2.4. Households ........................................................................................................................ 12. 2.2.2. Retailers ............................................................................................................................ 18. 2.2.3. Intermediate goods producers ........................................................................................... 19. 2.2.4. Monetary policy ................................................................................................................ 22. 2.2.5. Fiscal policy ...................................................................................................................... 23. 2.2.6. Market Clearing ................................................................................................................ 24. 2.4.1. Differences in the degree of trade openness across regimes ............................................. 26. 2.4.2. Robustness Check ............................................................................................................. 31. 治政 Calibration........................................................................................................................ 24 大立 Analyses ........................................................................................................................... 26 學. ‧ 國. 2.3. 2.2.1. ‧. 2.5 Welfare gains across regimes ........................................................................................... 35 2.6 Conclusion ....................................................................................................................... 38 Tables and Figures .................................................................................................................... 40. Nat. Table 2.2. The policy parameters for the Taylor rule. ................................................................. 40. Fig. 2.1. The coefficient of the average economic growth rate. er. sit. y. The openness of the Euro area. .................................................................................. 40. io. Table 2.1. al. Fig. 2.4. The country-wide productivity shock in the Home country....................................... 44. Fig. 2.5. The country-wide government expenditure shock in the Home country. .................. 45. Fig. 2.6. The output effect of a −1% productivity shock to the tradable sector under. n. Fig. 2.3. v i n C hof the tradable sectorUin the Home country. ......................... 42 The productivity shock engchi. against the degree of openness. .................................................................................. 41. Fig. 2.2. The productivity shock of the non-tradable sector in the Home country. .................. 43. different monetary policies. ....................................................................................... 46. Fig. 2.7. The output effect of a −1% productivity shock to the non-tradable sector under different monetary policies. ............................................................................. 47. Fig. 2.8. The output effect of a −1% country-wide productivity shock under different monetary policies. ....................................................................................... 48. Fig. 2.9. The output effect of a −1% country-wide government spending shock under different monetary policies. ............................................................................. 49. Fig. 2.10. The dynamics under a −1% productivity shock to the tradable goods sector under alternative elasticities of substitution. .............................................................. 49 iv.

(6) Fig. 2.11. The welfare gain Γ under alternative monetary policy responses to the output-gap. ................................................................................................................. 50. Fig. 2.12. Welfare as a function of the elasticity of substitution between the Home and Foreign tradable goods, θ . ....................................................................................... 50. References ................................................................................................................................. 51 Chapter 3 Macroeconomic Effects of Asset Purchase Programmes in a Monetary Union ... 54 3.1 Introduction ...................................................................................................................... 54 3.2 The Model ........................................................................................................................ 58 3.2.1. Households ........................................................................................................................ 59. 3.2.2. Capital Producers .............................................................................................................. 63. 3.2.3 Final Goods Producers ...................................................................................................... 64 3.2.4. Intermediate Goods Producers .......................................................................................... 65. 3.2.5. Fiscal Policy ...................................................................................................................... 66. 政治大 3.2.7 Market clearing conditions ................................................................................................ 69 立 Analytical analyses of the yield spread and transmission mechanisms ........................... 70 3.2.6 Conventional and Unconventional Monetary Policy ........................................................ 67. The yield spread under an unconventional monetary policy ............................................. 70. 3.3.2. Transmission mechanisms................................................................................................. 74. 學. Calibration........................................................................................................................ 76 Results .............................................................................................................................. 79. ‧. The case of symmetric model ........................................................................................... 79. 3.5.2. The case of asymmetric fiscal situation ............................................................................ 82. y. Nat. 3.5.1. sit. 3.4 3.5. 3.3.1. ‧ 國. 3.3. n. al. er. io. 3.6 Concluding remarks ......................................................................................................... 84 Tables and Figures .................................................................................................................... 85. Ch. i n U. v. Table 3.1. The Eurosystem’s holdings under the expanded asset purchase programme ............. 85. Table 3.2. The main expenditure on debt securities under the PSPP .......................................... 85. Table 3.3. The parameters of bonds and long-term yields .......................................................... 85. Table 3.4. The parameters of households and firms .................................................................... 86. Table 3.5. The parameters of monetary and fiscal policy ........................................................... 86. Fig. 3.1. 10-year government bond yields (range: 2007M1 - 2015M12) ................................. 87. Fig. 3.2. Yield spreads after the asset purchase program was implemented. engchi. (2015M1 - 2015M12) ................................................................................................ 87 Fig. 3.3. Yield spreads and relative debt-to-GDP ratio across member states in the Euro area (2008Q1 – 2014Q4) ......................................................................... 87. Fig. 3.4. Yield spreads and term premium under an unconventional monetary policy ............ 88. Fig. 3.5. Macroeconomic effect of long-term bond purchases: equal share of bond purchases 0.5 ............................................................................. 88. v.

(7) Fig. 3.6. Macroeconomic effect of long-term bond purchases: with the Home bond purchases of 0.4 ........................................................................ 89. Fig. 3.7. Macroeconomic effect of a PSPP shock: the Euro area and equal shares of bond purchases of 0.5........................................... 89. Fig. 3.8. Macroeconomic effect of an alternative policy with a share of Home bond purchases of 0.4 ..................................................................... 90. Fig. 3.9. Union-wide macroeconomic effects of bond purchase plans..................................... 90. Appendix 3.A Proof of Proposition 1 .................................................................................... 91 References ................................................................................................................................. 92 Chapter 4. 4.2.3. 政治大 Financial intermediaries .................................................................................................. 102 立 Production ....................................................................................................................... 105. 4.2.4. Fiscal policy .................................................................................................................... 108. 4.2.1 4.2.2. Households ........................................................................................................................ 99. 學. ‧ 國. 4.1 4.2. Optimal Conventional and Unconventional Monetary Policy in a Monetary Union .................................................................................................. 94 Introduction ...................................................................................................................... 94 The Model ........................................................................................................................ 98. 4.2.5 Conventional and unconventional monetary policy ........................................................ 110. 4.3.1. Efficient allocation .......................................................................................................... 112. 4.3.2. A framework of monetary union ..................................................................................... 113. 4.3.3. Optimal monetary policy................................................................................................. 116. io. sit. y. Nat. al. Numerical analysis ......................................................................................................... 125. n. 4.4. Optimal conventional and unconventional monetary policy .......................................... 111. er. 4.3. Market clearing conditions .............................................................................................. 110. ‧. 4.2.6. Ch. i n U. v. 4.4.1. Parameters ....................................................................................................................... 126. 4.4.2. Numerical analysis of optimal monetary policy ............................................................. 127. engchi. 4.5 Concluding Remarks ...................................................................................................... 130 Tables and Figures .................................................................................................................. 131 Table 4.1. The interest spreads between 5-year loan rate for consumption and 1-year deposit rate in the Euro area (range: 2007M1-2014M12) ............................ 131. Table 4.2. Parameters ................................................................................................................ 131. Table 4.3. Evaluation of quantitative easing ............................................................................. 131. Fig. 4.1. Interest spreads and sovereign yield spreads (range: 2007M1-2014M12) .............. 132. Fig. 4.2. OMP case vs. OMP-without-QE case under discretion ........................................... 133. Fig. 4.3. OMP case vs. OMP-without-QE case under commitment ....................................... 133. vi.

(8) Appendix 4.A Appendix 4.B Appendix 4.C Appendix 4.D Appendix 4.E Appendix 4.F. Derivation of the union-wide IS curve ......................................................... 134 Derivation of the union-wide New Keynesian Phillips curve ...................... 135 Derivation of relative consumption across countries and across types ........ 136 Derivation of the union-wide welfare function ............................................ 137 Proof of Proposition 1 ................................................................................... 143 Proof of eigenvalue μ1N ................................................................................. 143 2. References ............................................................................................................................... 145 Chapter 5 Conclusions ............................................................................................................... 148 References ............................................................................................................................... 150. 立. 政治大. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. vii. i n U. v.

(9) Chapter 1 Introduction Since the global recession in 2008, the economic performance among member states in the Euro area has been significantly non-synchronous.. In general, when each member state in a monetary. union does not have the same economic performance, it is challenging for a common monetary authority to design a suitable monetary policy for all. In this dissertation, we focus on the issue of economic stability among member states in a monetary union under the non-synchronicity among member states.. In Chapter 2 and Chapter 3, based on the insights from De Grauwe (2012), we. 政治大. explore two key features, “trade openness” and “fiscal fundamentals”, to explain the. 立. non-synchronicity among member states.. In Chapter 4, we study the optimal conventional and. ‧ 國. 學. unconventional monetary policies to analyze the state of the economic stability in the Euro area. ‧. since the recession, and show the linkage between economic stability in a monetary union and optimal monetary policy.. y. Nat. sit. Since January 1st, 1999, the Euro area has come into existence with the official launch of the. n. al. er. io. euro, and thus the euro has become the official common currency in the Euro area. The member. i n U. v. states in the Euro area presented with the benefit and challenges from a common currency and a common monetary authority.. Ch. engchi. However, the monetary union regime is challenged by how to. influence the economy in these member states which have joined the Euro area and abandoned their own currencies.. Therefore, a number of studies on the Euro area discuss and focus on. convergences or divergences of economic trends among these member states in the Euro area.. In. the previous literature, analyses and suggestions are presented with economic evaluation of joining the monetary union. Based on a survey study on the Euro area by Haan et al. (2007), the economic synchronization among member states in the Euro area has made it clear that business cycles among member states have become more similar.. In addition, inflation and government fiscal situations among member 1.

(10) states have synchronicity. 1. Nevertheless, although some survey studies show evidence that. business cycles are becoming more synchronous across member states in the Euro area, since the global financial crisis in 2008, the economic performance of the Euro area has declined significantly, and has not shown signs of recovery.. In particular, there have been great differences in the. economic performance of different countries. This divergence problem of economic trends could be caused by some features of economy which differ among member states.. The results of recent. literature on the Euro area indicate some features of member states make a difference in the economic performance of different countries.. 政治大 economic performance across member states on different levels. 立. Several existing studies for the Euro area indicate some important features which influence the One key feature is the trade. openness which causes the economic performance among member states to significantly differ.. ‧ 國. 學. This reflects the conclusion in Lombardo and Ravenna (2014) and De Grauwe (2012) indicate that Although the degree of. ‧. the trade openness across regions in the Euro area is asymmetric.. y. Nat. openness remains an important issue in monetary policy studies, none of these studies analyze the Thus, in this text,. er. io. sit. monetary union regime of countries in terms of different degrees of openness.. we attempt to bridge this gap in the literature by examining the macroeconomic effects of openness. n. al. Ch. on the monetary union countries in the Euro area.. engchi. i n U. v. Another key feature is the fiscal situation of member states. Numerous studies show that the fiscal fundamentals within each country has a significant impact on sovereign yield spreads across member states in the Euro area over the financial crisis period.. Beirne and Fratzscher (2013) and. Afonso et al. (2014) show that the yield spreads can be well explained by the debt-to-GDP ratio during the financial crisis, but the debt-to-GDP ratio has no statistically significant effect and the. 1. Lopes and Papell (2012) and Busetti et al. (2007) show the convergence of inflation among member states in Euro area. De Grauwe (2012) shows the convergence of government fundamentals among member states happens before the global financial crisis in 2008. 2.

(11) yield spreads have smaller coefficients during the pre-crisis period. Bernoth and Erdogan (2012) indicate that financial markets did not respond to government deficit ratios before the financial crisis occurred; during the financial crisis, the strong increase in the yield spreads of sovereign bonds can be attributed to the fiscal fundamentals. For the reasons above, in this study we discuss how these two features influence the economic stability in each member state and in the Euro area, respectively. In Chapter 2, we develop a two-country, two-sector model under a monetary union and flexible exchange rate regimes with trade openness differentials, and then use the model to examine the We attempt to bridge this 政治大 gap in the literature by examining the macroeconomic effects of openness on the monetary union 立 relative macroeconomic effects of trade openness under both regimes.. The presentation of our model is similar to that in Eggertsson et al. (2014).. To. 學. ‧ 國. countries.. highlight the macroeconomic effects of the monetary union regime on the regions with different. ‧. degrees of openness, we compare the impacts of productivity and fiscal shocks on countries with. y. Nat. different degrees of openness either under the monetary union regime or under a flexible exchange. er. io. sit. rate regime with independent monetary policies.. Some main results emerge from our analysis regarding an adverse shock of either country-wide. n. al. Ch. productivity or a country-wide government expenditure.. engchi. v i n First, U the decline in output is greater for a. country with low openness under both regimes. Second, the monetary union will result in a greater decline in output if the monetary authority attaches a higher weight to output stabilization. Third, the high elasticity of substitution results in a greater difference in output between the two regimes. Chapter 3 investigates the portfolio of the quantitative easing policy that the European Central Bank has implemented following the European debt crisis.. The current public sector purchase. programme (the PSPP) is designed so as to purchase long-term bonds with the shares based on the sizes of the respective countries.. Therefore, more bonds are purchased from the large countries. with lower long-term yields (such as Germany and France) than from the small countries with 3.

(12) higher long-term yields (such as Italy and Spain).. Alternative asset purchase plans are proposed. and evaluated in this study by using a two-country DSGE model with a common currency.. We. will explain yield spreads under the PSPP across member states and explore differential macroeconomic effects between member states. In this chapter, our model essentially follows the framework of Andrés et al. (2004) and Chen et al. (2012). To evaluate the monetary policy of the monetary union, we extend the closed-economy DSGE model of Chen et al. (2012) to a two-country model with a monetary union. There are two types of bonds, namely, short-term and long-term bonds.. An unconventional monetary policy is. By observing the movement of the yield 政治大 spreads across countries under the PSPP, we obtain an analytical solution of the yield spreads across 立 implemented by the purchase of long-term bonds.. countries. It is shown that the effects of the asset purchase programme on the yield spreads. ‧ 國. 學. crucially depend on the relative quality of the Home and Foreign bonds as well as the portfolio of. ‧. bonds purchased.. y. Nat. We analytically show that the asset purchase program does help lower long-term yields and that. er. io. sit. the portfolio of the program does matter for the long-term yields and macroeconomic performance. The counterfactual analyses with simulations show that an alternative asset purchase program which. al. n. v i n Ccountries involves purchasing more bonds from higher long-term yields not only helps to U h e n gwith i h c. lower the long-term yields and to boost the output level of countries in trouble (with higher original long-term yields), but also increases the aggregate output of the monetary union. Chapter 4 constructs a log-linearized classical model of an optimal monetary policy based on our two-country DSGE model of a monetary union, in line with Eggertsson and Woodford (2003) and Jung et al. (2005).. The main contribution of this study is in implementing optimal conventional. and unconventional monetary policies in a monetary union.. We use a two-country model of a. monetary union and show that a common monetary authority minimizes the union-wide welfare loss through both conventional and unconventional instruments.. 4.

(13) Our main findings in Chapter 4 can be briefly summarized as follows.. First, comparing our. results with classical literature, there is a lower volatility of the union-wide economy as adding the qualitative easing under either discretion or commitment. Second, a shorter zero lower bound period for the nominal interest rate under commitment leads to a shorter period of forward guidance by the interaction of these policies.. Final, optimal allocation of the qualitative easing in each. country is the same (50% for each in a two-country framework) when the strength of the spillover effect in each country is identical. Finally, the main results and some implications to the theories in each chapter are summarized in Chapter 5.. 立. 政治大. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. 5. i n U. v.

(14) References Afonso, A., Arghyrou, M. G. and Kontonikas, A. (2014), “Pricing Sovereign Bond Risk in the European Monetary Union Area: An Empirical Investigation,” International Journal of Finance and Economics 19, 49-56. Andrés, J., López-Salido, J. D. and Nelson, E. (2004), “Tobin's Imperfect Asset Substitution in Optimizing General Equilibrium,” Journal of Money, Credit, and Banking 36, 665-690. Beirne, J. and Fratzscher, M. (2013), “The Pricing of Sovereign Risk and Contagion During the European Sovereign Debt Crisis,” Journal of International Money and Finance 34, 60-82. Bernoth, K. and Erdogan, B. (2012), “Sovereign Bond Yield Spreads: A Time-varying Coefficient Approach,” Journal of International Money and Finance 31, 639-656.. 政治大. Busetti, F., Forni, L., Harvey, A. and VendittiInflation, F. (2007), “Convergence and Divergence. 立. within the European Monetary Union,” International Journal of Central Banking 3, 95-121.. ‧ 國. Purchase Programmes,” Economic Journal 122, 289-315.. 學. Chen, H., Cúrdia, V. and Ferrero, A. (2012), “The Macroeconomic Effects of Large-scale Asset. Press.. ‧. De Grauwe, P. (2012), The Economics of Monetary Union, 9th Edition, Oxford: Oxford University. y. Nat. sit. Eggertsson, G. B., Ferrero, A. and Raffo, A. (2014), “Can Structural Reforms Help Europe?,”. er. io. Journal of Monetary Economics, 61, 2-22.. al. n. v i n C Monetary Policy,” Brookings Papers onhEconomic e n g cActivity h i U1, 139-211.. Eggertsson, G. B. and Woodford, M. (2003), “The Zero Bound on Interest Rates and Optimal. Haan, J. D., Inklaar, R. and Jong-A-Pin, R. (2008), “Will Business Cycles in the Euro Area Converge? A Critical Survey of Empirical Research,” Journal of Economic Surveys 22, 234-273. Jung. T., Teranishi, Y. and Watanabe, T. (2003), “Optimal Monetary Policy at the Zero-Interest-Rate Bonund,” Journal of Money, Credit and Banking 37, 813-836. Lombardo, G. and Ravenna, F. (2014), “Openness and Optimal Monetary Policy,” Journal of International Economics 93, 153-172. Lopez, C. and Papell, D. H. (2012), “Convergence of Euro Area Inflation Rates,” Journal of International Money and Finance 31, 1440-1458.. 6.

(15) Chapter 2 Internal Imbalances in the Monetary Union with Asymmetric Openness 2.1 Introduction Since the global recession in 2008, the economic performance of the Euro area has declined significantly, and has not shown evident recovery.. In particular, there have been great differences. in the economic performance of different countries.. In the leading country, Germany, as an. example, GDP declined by 5.64% in 2009, but recovered relatively quickly after 2009. On the. 政治大. contrary, Portugal, Italy, Greece and Spain have sunk into long-term recession. GDP continued to. 立. decline in these four countries from 2012 to 2013. As a result, the economic characteristics that. ‧ 國. 學. cause the different reactions of the regions of the monetary union to the same external shock McKinnon (1963), following Mundell (1961), analyzes how. ‧. become the main focus of concerns.. openness differentials may affect the external and internal economy and stability of prices for a. y. Nat. He finds that, when an economy with a high degree of openness employs flexible. sit. region.2. n. al. er. io. exchange rates to dampen the external deficit, it is likely to suffer from greater price instability.. i n U. v. Thus, a group of open areas which trade extensively with each other would find it beneficial to form a monetary union.. Ch. engchi. Based on this view, this study attempts to analyze whether or not the economic. openness differential can be one of the causes of the different responses of regions in a monetary union to the same shock.. An alternative question that we are interested in concerns whether or not. a country would perform better under the external shock if it did not participate in the monetary union. 2. In the existing literature, there are several methods for measuring the degree of openness.. For example,. Lombardo and Ravenna (2014) use several indicators which include the share of non-tradable in consumption and investment demand and the share of imported intermediates in domestic production to measure the degree of openness. In addition, McKinnon (1963) defines “openness” as the share of tradable goods in consumption. In this chapter, we follow the setting of McKinnon (1963). 7.

(16) In the past decade, there have been many studies focusing on the possible benefits and losses from a monetary union based on the DSGE model.. For example, Benigno (2004) and Ferrero. (2009) show the optimal macro policies in the Euro area. Eghgertsson et al. (2014) analyze whether structural reforms are helpful in boosting output and regaining competitiveness in the Euro area.. However, many issues remain obscure. In particular, the literature analyzing the influence. of economic openness on a monetary union using DSGE models is relatively rare. However, countries in a monetary union can significantly differ in their degree of openness. Take the Euro area as an example. area do differ.. The degrees of economic openness of countries in the Euro. 政治大 According to the input-output data that they use, Lombardo and 立. Lombardo and Ravenna (2014) have shown that the openness across regions in the. Euro area is asymmetric.. Ravenna (2014) estimate the share of tradable goods in consumption of 25 OECD countries.. Table. ‧ 國. 學. 2.1 shows the degree of openness of the main regions in the Euro area, as estimated by Lombardo It is shown that the degree of openness of Belgium is the highest (0.834). ‧. and Ravenna (2014).3. The difference in the openness,. y. Nat. while the degree of openness of Finland is the lowest (0.487).. io. sit. The degrees of openness of Germany, France, Italy and. er. from the highest to the lowest, is 0.346.. Spain, which are the four largest economies of the Euro area, are 0.705, 0.622, 0.551 and 0.622,. n. al. Ch. respectively, which also exhibit significant differences.. engchi. i n U. v. [Insert Table 2.1 here] Panels (a) and (b) in Fig. 2.1 depict the relationship between the degree of economic openness and the average economic growth rate both before and after the great recession (2000-2007 vs. 2008-2013).. It can be clearly seen that the five countries with lower degrees of economic. openness were strongly affected by the global recession. The empirical observations exhibited in. 3. Our study only uses the data for 10 countries, and excludes the data for Ireland and Luxembourg, as the ratios of GDP of these two countries are less than 3% of the overall GDP of the Euro area. 8.

(17) Panels (a) and (b) of Fig. 2.1 indicate that the different degrees of openness play a crucial role in affecting macroeconomic performance. [Insert Figure 2.1 here] The degree of openness remains an important issue in monetary policy studies.. Using a small. open economy with tradable goods, Faia and Monacelli (2008) analyze the relationship between the degree of openness and the volatility of the optimal exchange rate.. Duarte and Obstfeld (2008). show that a two-country model with non-tradable goods, rather than home bias, generates asymmetric responses of the home and foreign consumptions to shocks, and results in exchange rate. 政治大 (2014) measure the welfare loss under shocks for countries with different levels of openness. 立 volatilities.. With the estimated degrees of openness for the 25 countries, Lombardo and Ravenna. Using a two-country model with tradable goods only, Corsetti (2006) deals with the relationship. ‧ 國. 學. between openness and exchange rate volatility under an optimal stabilization policy, and shows that. ‧. the volatility increases with the positive degree of home bias.. y. Nat. However, none of these studies analyze the monetary union regime of countries with different. er. io. sit. degrees of openness. Thus, in this chapter, we attempt to bridge this gap in the literature by examining the macroeconomic effects of openness on the monetary union countries.. n. al. Ch. n U engchi. iv. Our. analytical framework consists of a two-country (Home and Foreign countries), two-sector (tradable and non-tradable sectors) economy with sticky prices. The presentation of our model is similar to that in Eggertsson et al. (2014).. To highlight the macroeconomic effects of the monetary union. regime on the regions with different degrees of openness, we compare the impacts of the productivity and fiscal shocks on countries with different degrees of openness under the monetary union regime, and under a flexible exchange rate regime with independent monetary policies.4. 4. Most of the studies on monetary union use the two-country framework. With a two-country DSGE model, Benigno (2004) has analyzed the optimal policy for the monetary union.. Beetsma and Jensen (2005) as well as. Ferrero (2009) explore the optimal fiscal policy and monetary policy in the monetary union. Some studies use the multiple-country framework to analyze the monetary union issues. 9. For example, following Gali and Monacelli.

(18) While the optimal policy appears to be the focus of monetary union studies,5 some studies also emphasize the regional differentials of regions in the monetary union. Duarte and Wolman (2008) deal with the relationship between fiscal policies and regional inflation differentials in a monetary union.. When the labor income tax is taken into account, the regional fiscal policy does affect the. volatility of the inflation differentials, but the volatility of output of each country remains roughly unchanged under this fiscal policy. Altissimo et al. (2011) use a two-country, two-sector (tradable and non-tradable) model to explore the effects of productivity shocks of the tradable and non-tradable sectors on the regional inflation differentials. They find that there are greater output. 政治大 can be higher under the productivity shock arising in the non-tradable sector. 立. differentials under the productivity shock arising in the tradable sector, but inflation differentials. However, these studies assume that the degrees of openness of countries in the monetary union. ‧ 國. 學. are identical.. The monetary union studies, which use the two-country model with asymmetric. ‧. degrees of openness, focus on one specific country within the Euro area.. For example, Rabanal. y. Nat. (2009) and Forni et al. (2010) explore the relationship between Spain and the Euro area and the. er. io. sit. relationship between Italy and the Euro area, respectively. Lama and Rabanal (2014) discuss whether or not the U.K. should enter the monetary union, by focusing on the trade and financial. al. n. v i n C h three-countryUNew Keynesian model of the Spanish Veld et al. (2014) use an estimated engchi. linkages.. economy with financial frictions to show that, under strong capital inflows which led to booms in housing prices, tightening collateral constraints of households and firms, will eventually result in a collapse in housing prices that lead to a sharp reduction in capital inflows, and in turn cause the slump in Spain's economic activities.. (2008), Leith and Wren-Lewis (2011) use a monetary union model with infinitely small economies, where each country has its own fiscal policy maker but one common monetary authority for the union, to analyze the interaction between the country-specific government debt and the common monetary policy of the union. In addition, their paper compares the across-regime differentials under the debt shock. 5. The studies on the optimal policy for the monetary union include Benigno (2004), Beetsma and Jensen (2005), Ferrero (2009), and many others. 10.

(19) In this chapter the analysis of the regional differentials is similar to the approach in Duarte and Wolman (2008) and Altissimo et al. (2011). macroeconomic effects across regimes.. Moreover, we extend their analyses to compare the. We find that the monetary union regime helps moderate. regional inflation differentials as compared to the flexible exchange rate regime.. Shocks to. different sectors result in different effects on the regional output differentials. The remainder of this chapter is arranged as follows. Section 2.2 outlines the structure of the model. Section 2.3 presents the calibration, Section 2.4 analyzes the influence of shocks on openness, and Section 2.5 measures the effects of openness on welfare. conclude.. 2.2. 立. The Model. In Section 2.6 we. 政治大. ‧ 國. Foreign ( F ).. 學. We assume that the world economy consists of two unequally-sized countries, Home ( H ) and The world economy is populated by a continuum of agents on the interval [ 0, 1] .. belongs to country F .. sit. y. Nat. [n, 1]. ‧. The population on the segment [ 0, n ] belongs to country H , while the population on segment. al. Each household. er. io. There is a continuum of households of measure one in the Home country.. v. n. derives utility from the consumption of tradable and non-tradable goods, but obtains disutility from work hours.. Ch. engchi. i n U. We assume that labor is immobile across countries.. tradable and non-tradable goods using labor that is country-specific.. Therefore, firms produce The production process is a. two-stage process: firstly, a representative perfectly competitive retailer combines the differentiated intermediate goods to produce the final goods.. Secondly, monopolistically competitive. intermediate goods producers set the price of each differentiated intermediate good under a staggered price setting. This chapter explores the effects of monetary mechanisms under both monetary union and flexible exchange rate regimes.. Under the monetary union regime, the common monetary. authority formulates monetary policies that are union-wide which means that they share the same 11.

(20) interest rate level. In economies with a flexible exchange rate regime, each monetary authority sets respective monetary policies over only one country which has its own interest rate level. 2.2.1 Households Each country has its representative household that provides labor inputs for tradable and non-tradable sectors within his own country. The representative household’s decision problem consists of two steps: the first step regarding its decisions consists of maximizing lifetime utility subject to a budget constraint, and the second step regarding its decisions consists of minimizing the costs of composite consumption goods. 2.2.1.1. 政治大. The representative household’s utility maximization problem. 立. The expected lifetime utility of household h in country H is given by. ‧ 國. 學.  Ct ( h )1−σ Lt (h )1+ϕ  E0  β  − , 1+ϕ  t =0  1−σ ∞. t. (2.1). ‧ y. Nat. where E0 is the expectation operator, conditional on information available at time 0.. Ct ( h ). er. io. sit. denotes consumption from household h at time t , Lt (h ) denotes labor supply, the parameter β denotes the intertemporal discount factor, σ denotes the coefficient of relative risk aversion, and. al. n. v i n Cthe denotes the inverse of h elabor i U n gsupply c h elasticity.. the parameter ϕ. Under the flexible exchange rate regime where these two countries implement separate monetary policies, we assume that the households belonging to country H divide up their wealth for the domestic currency and two nominal risk-free bonds with a maturity of one period, denominated in domestic and Foreign currency respectively.. A household h maximizes the expectation of Eq.. (2.1) subject to a budget constraint as follows: Pt Ct (h ) + BH , t (h ) +. St BF , t (h ). ψ B, t. = Wt Lt ( h ) + (1 + it ) BH , t −1 ( h ) + St (1 + it* ) BF , t −1 ( h ) + π t ( h ) + Tt ( h ) , 12. (2.2).

(21) where BH , t (h ) and BF , t (h ) are households’ holdings of nominal risk-free one-period bonds that pay one unit of Home and Foreign currency when they mature. rates for bonds.. it and it* are the nominal interest. Pt and Wt are the aggregate price level and the nominal wage in country H .. The household pays lump-sum taxes Tt (h ) .. π t ( h ) is the profit of the intermediate-goods. producers. By following Benigno (2001), Erceg et al. (2006) and Eggertsson et al. (2014), the transaction cost ψ B, t that the domestic household’s holdings of foreign bonds incurs guarantees a stationary net foreign asset position in this model.. S t is the nominal exchange rate, defined as the. Home-currency price of one Foreign currency.. 政治大We assume that only the domestic household has to pay the transaction 立cost which depends on the ratio of economy-wide holdings of The transaction cost is given by Eq. (2.3) with ψ B > 0 .. ‧.  St nBF , t (h )     .   PtYt . ψ B , t ≡ exp − ψ B  . ‧ 國. . 學. net foreign assets to nominal output.6. Nat. y. (2.3). er. io. sit. In this chapter, the function ψ B , t (⋅) captures the transaction cost, for the households belonging. al. to country H , of undertaking positions in the international asset market. Eq. (2.3) implies that. n. v i n the transaction cost depends on the netCforeign to GDP ratio. h e nassets gchi U. Borrowers will be charged a. premium on the foreign interest rate and lenders will receive a remuneration lower than the foreign interest rate.. On the other hand, the households from country F allocate their wealth only. between foreign currency and one nominal risk-free bond denominated in a unit of their own. 6. The setting for the transaction cost follows the work of Benigno (2001). There are some restrictions on ψ B , t (⋅) :. ψ B , t (0) = 1 and ψ B , t (⋅) equals 1 only if BtF = 0 ; ψ B , t (⋅) is a differentiable and decreasing function that is close to zero. There are two purposes behind these restrictions: the net foreign assets can avoid the unit root problem, which is characterized by stationarity.. Besides, given that steady-state net foreign assets are set to zero, they have. no influence on the dynamics of the log-linearized model. state for consumption and assets. 13. This will be useful in arriving at a well-defined steady.

(22) currency. Without facing any transaction cost, they can lend and borrow at a risk-free nominal interest rate i * . Similarly, the budget constraint of households in country F can be written as Pt *Ct* ( f ) + BF* , t ( f ) = Wt * L*t ( f ) + (1 + it* ) BF* , t −1 ( f ) + π t* ( f ) + Tt * ( f ) .. (2.4). The representative household for each country decides the consumption, bonds and labor supply in both the tradable and non-tradable sectors. The labor supply decisions of the Home and Foreign households are given by Eqs. (2.5) and (2.6) respectively: −σ  W  ϕ Ct (h )  t  = Lt (h ) ,  Pt  −σ  W Ct* ( f )  t*  Pt.  * ϕ  = Lt ( f ) . . 政治大. 立. (2.6). 學. ‧ 國. *. (2.5). Optimization implies that the Home and Foreign consumption Euler equations are. ‧ sit. n. al. er. io.  C * ( f )  −σ  P *   β (1 + i )Et  t +*1   t*   = 1 ;  Ct ( f )   Pt +1   * t +1. Ch. (2.7). y. Nat.  C (h )  −σ  P   β (1 + it +1 )Et  t +1   t   = 1 ;  Ct (h )   Pt +1  .  C (h )  −σ  P  S   * β (1 + it +1 )ψ B , t Et  t +1   t  t +1   = 1 ,  Ct (h )   Pt +1  S t  . engchi. i n U. (2.8). v. (2.9). Eqs. (2.7) and (2.8) represent the Home and Foreign Euler equations, which are obtained by optimally choosing the holding of nominal bonds that are denominated in their own currencies. Eq. (2.9) represents the Euler equation of households in country H , which is the optimal condition associated with the holding of Foreign-currency-denominated nominal bonds. Following Benigno (2001), we assume that Home-currency-denominated bonds are in zero-net supply within a specific country. Thus, the budget constraint of Home household can be written as: 14.

(23) PC t t ( h) +. St BF , t ( h ). ψ B, t. = Wt Lt ( h ) + St (1 + it* ) BF , t −1 ( h ) + π t ( h ) + Tt ( h ) .. (2.10). Under the monetary union regime where one common currency is used across the union, net Foreign bonds are denominated in the common currency across countries.. At time t , the. household’s budget constraints in countries H and F are expressed as Eqs. (2.11) and (2.12), respectively: Pt Ct ( h ) +. BF , t ( h ). ψ BMU ,t. = W t L t ( h ) + (1 + itMU ) BF , t −1 ( h ) + π t ( h ) + Tt ( h ) ;. (2.11). Pt * Ct* ( f ) + BF* , t ( f ) = Wt * L*t ( f ) + (1 + itMU ) BF* , t −1 ( f ) + π t* ( f ) + Tt* ( f ) ,. 政治大. 立. (2.12). where itMU is the common interest rate prevailing within the monetary union.. ‧ 國. 學. MU The transaction cost ψ B, t is given by.  nBF , t (h )     ,  P Y  t t . (2.13). sit. y. Nat. . ‧. .   ψ BMU , t ≡ exp − ψ B . n. al. er. io. Optimization implies that the consumption Euler equation of the household in the Home and Foreign countries can be expressed as  C (h )  t +1  C  t (h ) . MU β (1 + itMU +1 )ψ B , t E t  . β (1 + i. MU t +1. −σ. Ch. engchi.  Pt      = 1 ;  Pt +1  . i n U. v. (2.14).  C * ( f )  −σ  P *   )Et  Ct +*1( f )   Pt*  = 1 ,  t   t +1  . (2.15). Eqs. (2.14) and (2.15) represent the Home and Foreign Euler equations respectively, which are obtained by optimally choosing the holding of the common-currency-denominated nominal bonds.. 15.

(24) 2.2.1.2 The representative household’s cost minimization problem The Home aggregate consumption buddle Ct ( h ) comprises the consumption of tradable goods and non-tradable goods which is defined in the form of a CES production function with a constant elasticity of substitution η > 0 , η. η −1 1 η −1  η −1  η1 Ct (h ) = λ CT , t (h ) η + (1 − λ )η C N , t (h ) η  ,  . (2.16). where λ represents the proportion of tradable goods in the overall consumption, with 0 < λ < 1 .. 政治大 and λ denote the degree of openness across countries, as in McKinnon 立. This proportion may be different for the household in country F , which is denoted with asterisks as λ* . In our study, λ. *. ‧ 國. 學. (1963). In the following analyses, we will examine how the openness differentials in λ and λ * will generate regional economic differentials.. ‧. The consumption of tradable goods consists of both domestic and imported goods with a constant. Nat θ. 1 θ −1 θ −1  θ −1  1 CT , t (h ) = γ θ CH , t (h ) θ + (1 − γ )θ CF , t (h ) θ  ,  . n. al. Ch. engchi. er. io. sit. y. elasticity of substitution θ > 0 ,. i n U. v. (2.17). where γ represents the home bias, measured by the proportion of Home-produced tradable goods in the consumption of tradable goods, with 0 < γ < 1 .. This proportion may be different for. households in country F , and is denoted by γ * .7. 7. This is a common specification in the existing literature such as Benigno and Thoenissen (2003), Corsetti et al. (2008), and Eggertsson et al. (2014). The degree of trade openness which is measured by the share of tradable goods in the overall consumption λ is consistent with the definition as Lombardo and Ravenna (2014) indicate. With this specification, when γ = 1 and γ * = 1 , we have the result: exports = imports = 0. In the extreme case, this economy remains open, but there is complete home bias and consumers make consumption of domestic tradable goods only. 16.

(25) The commodity demand of the domestic household sector derived from cost minimization is given by −η. −η. P   PT , t   Ct (h ) ; C N , t ( h ) = (1 − λ )  N , t  Ct ( h ) , CT , t (h ) = λ   Pt   Pt  −θ.  PH , t  P  CT , t (h ) ; CF , t ( h ) = (1 − γ )  F , t CH , t (h ) = γ  P   PT , t   T,t . (2.18). −θ.   CT , t ( h ) . . (2.19). In the same spirit, the commodity demand of the Foreign household sector is expressed as −η. −η. C. * T,t.  PT*, t ( f ) = λ  *  Pt.  P*   C *t ( f ) ; C N* , t ( f ) = (1 − λ * )  N *, t   Pt  . C. * H,t.  PH* , t ( f ) = γ  *  PT , t.  P*   C *T , t ( f ) ; C F* , t ( f ) = (1 − γ * )  F* , t   PT , t  . *. 立. −θ.  *  C t ( f ) , . 政治大. (2.20). −θ.  *  C T , t ( f ) . . (2.21). 學. ‧ 國. *. ; Pt* = [λ* PT*, t1−η + (1 − λ* )PN* , t 1−η ]1−η , 1. ]. al. n. PT , t = γ PH1−,tθ + (1 − γ )PF1−, tθ. 1 1 −θ. sit. 1 1−η. io. [. ]. y. Nat. [. Pt = λ PT1,−tη + (1 − λ )PN1−, ηt. ; PT*, t = [γ * P*H1−,θt + (1 − γ * )P*F1−, θt ]1−θ , 1. Ch. engchi. (2.22). er. as. ‧. Given the above specification, the associated price indexes for country H and F are defined. i n U. v. (2.23). where Pt and Pt represent the consumption price index in countries H and F, respectively. *. PT , t. * and PT , t represent the overall price index for tradable goods in countries H and F, respectively.. PH , t and PF , t represent the prices of tradable goods in country H and F.. PN , t and PN* , t represent. the prices of non-tradable goods in countries H and F. While there are two currencies and the nominal exchange rate is freely determined, we assume that the law of one price holds for differentiated goods, which implies PH , t = St PH* , t ,. (2.24). PF , t = St PF*, t ,. (2.25) 17.

(26) PT , t = S t PT*, t ,. (2.26). Under the monetary union where goods are denominated in the common currency, the associated prices of the Home and Foreign countries: PH , t = PH* , t ,. (2.27). PF , t = PF*, t .. (2.28). and. 2.2.2 Retailers. 治政 In the tradable ( k = H ) and non-tradable ( k = N ) sectors, 大 a representative retail producer 立 combines raw goods according to a CES production function with a constant elasticity of ‧ 國. ‧. θk.  θk −1 θ k −1  θk λk   Yk , t (q ) θk dq  ,   0  1. (2.29). er. io. sit. y. Nat. Yk , t.   1 =   λk . 學. substitution θ k > 0 ,. where q denotes an intermediate goods producer. The segments [ 0, λH ] and [ λH , 1] are labor. n. al. Ch. inputs of the tradable and non-tradable sectors where λ H. engchi. iv n =U λ and λ. N. = 1 − λ be the tradable and. non-tradable sectors’ sizes, respectively. The representative retailer of sector k maximizes profits subject to its technological constraint as follows: λk. max Pk , t Yk , t −  Pk , t ( q ) Yk , t ( q ) dq .. Yk , t ( q ). (2.30). 0. 18.

(27) The first-order condition of Eq. (2.30) yields the standard demand function as follows 1  Pk , t (q ) Yk , t (q ) =   λk  Pk , t . −θ k. Yk , t ,. (2.31). where Pk , t (q ) indexes the price of the q th variety of the good produced in sector k . The zero profit condition implies that the price index in sector k is as follows:. Pk , t. 1 =  λk. 1. . λk. 0.  1−θk 1−θ Pk , t (q ) k dq . . (2.32). 2.2.3 Intermediate goods producers. 立. 政治大. In each sector, intermediate goods producer q uses the following technology. ‧ 國. 學. Yk , t (q ) = Z t Ak , t Lk , t (q ) ,. ‧. where k = H , N . Lk , t (q ) is the labor demand of firm q of the sector k at time t .. (2.33). Z t is an. Nat. sit. y. exogenous country-wide productivity shock in the Home country at time t , which will be identical Ak , t is the sector-specific productivity shock to. al. n. sector k at time t .. er. io. across the tradable and non-tradable sectors.. i n U. v. We assume that the country-wide productivity shock follows an AR (1). process:. Ch. engchi. Z t = Z tρ−Z1 Z 1− ρ Z exp(ε Z , t ) .. (2.34). The sector-specific productivity shock to sector k follows an AR (1) process: ρ. Ak , t = Ak ,Atk−1 A. 1− ρ Ak. (. ). exp ε Ak , t ,. (2.35). Z where ρ Z < 1 , ρ A < 1 , ε t ~ N ( 0, σ Z ) and ε A , t ~ N ( 0, σ A ) . Z , A , and other variables with a k. k. k. upper bar represent their steady-state value.. 19.

(28) Intermediate goods producers are imperfectly competitive, and they choose the price Pk , t (q ) to maximize profits subject to their technology constraint Eq. (2.33). By following Calvo (1983), we assume that the intermediate goods producers change their price on a staggered basis. The firm q in sector k cannot change its price with probability Θk in each period.. According to the. technology, the marginal cost can be obtained from the intermediate goods producers’ cost minimization subject to their technology constraint: MCk , t (q ) = MCk , t =. Wk , t Z t Ak , t. ,. (2.36). 政治大. where MC k , t (q ) denotes the nominal marginal cost of firm q in sector k at time t .8. 立. Wt. denotes the nominal wage of firm q in sector k .. ‧ 國. 學. According to the demand function and the production function, Eqs. (2.31) and (2.33), the. io. sit. y. Nat. Yk , t d k , t = Z t Ak , t Lk , t ,. n. al. where the labor market equilibrium implies that λk. Lk , t =  Lk , t (q )dq ,. Ch. (2.37). er. be written as. ‧. aggregate production function of intermediate goods, by aggregating the production of all firms can. engchi. i n U. v. 0. (2.38). and d k , t denotes a price dispersion index as. dk, t ≡. 8. 1. λk. . λk. 0.  Pk , t (q )  dq .   Pk , t . (2.39). The marginal cost is identical across firms, regardless of firm-specific characteristics. 20.

(29) Then, for a given marginal cost function, the intermediate goods producers decide their optimal price subject to their respective demand functions Eq. (2.31). The optimal price setting problem of firm q at time t is defined as ∞ s  ~ E max t  Θ k Λ t , t + s pk , t (q ) − MC k , t + s Yk , t + s (q ) , ~ pk , t ( q )  s =0 . [. ]. (2.40). −σ where Λ t , t +s ≡ β s (Ct +s Ct ) (Pt Pt +s ) is the stochastic discount factor for nominal assets between t and. t + s , Yk , t + s ( q ) is given by Eq. (2.31) which is the demand at t + s conditional on the optimal price reset at t , p k , t that remains effective at t + s .. Θk , lying between [0, 1] , is the probability. 政治大. that firms will not change the price in each period.. 立. ~ ~ In equilibrium, all firms set pk , t (q ) = pk , t . The optimality condition is expressed as. ‧ 國. ‧. Pk , t. 學. ~ pk , t. ∞  s  Et  Θ ks Λ t , t + s  ∏ Π θkk, t +h  MC k , t + sYk , t + s θ s =0  h =1  = k , s ∞ θk − 1  θ k −1  s Et  Θ k Λ t , t + s  ∏ Π k , t +h  Pk , t + sYk , t + s s =0  h =1 . Nat. sit. y. (2.41). n. al. er. io. where Π k , t +1 = ( Pk , t +1 Pk , t ) denotes the inflation rate between t and t + 1 in sector k . In sector. i n U. v. k , since the firms who do not change their price at period t , on average, will maintain their price. Ch. engchi. at the previous period, the price index Eq. (2.32) yields a non-linear relation between the optimal price (relative to the aggregate price level) and the inflation rate: ~ pk , t Pk , t. 1.  1 − Θ k Π θkk, −t 1  1−θk  . =  1− Θ  k  . (2.42). 21.

(30) According to the price index in Eq. (2.32) and the staggered price setting, we derive the law of motion for the index of price dispersion:  1 − Θk Π k , t d k , t = Θ k d k , t −1Πθkk, t + (1 − Θ k )   1 − θk . θ k −1.    . θk θ k −1. .. (2.43). 2.2.4 Monetary policy. In this section, we introduce two different specifications of the monetary policy framework. Monetary policy is conducted with a Taylor rule that targets the CPI inflation and output deviating from their steady-state values.. 治政 Under the flexible exchange rate regime, the monetary authority 大 in each country acts separately 立 and sets its own interest rate according to the economic situation of its own country. The interest ‧ 國. 學. it denotes the Home interest. rate levels in the domestic and foreign asset markets are different.. (1− ρ )υ1. al. n. Π. 1 + it* = (1 + i * ). 1− ρ. (1 + i )  Π * ρ t −1.   Π  * t *.  Yt    Y . (1− ρ ). (1− ρ )υ 2. exp(ε Hm , t ),. C Yh ( )  e  n gexp c(εh i) .. υ1*. *. 1− ρ. υ 2*. m F,t. t. *. Y . sit. (1 + it −1 )ρ  Π t . er. 1− ρ. io. 1 + it = (1 + i ). y. Nat. given by. ‧. rate and it* denotes the Foreign interest rate. The Taylor rules of the country H and F are. i n U. v. where ρ is the degree of interest rate smoothing, with ρ ∈ (0, 1) .. (2.44). (2.45). i and i * are the steady-state. values of interest rates in the Home and Foreign countries, respectively.. ε Hm , t and ε Fm, t are i.i.d. monetary policy shocks in the Home and Foreign countries, respectively, and υ1 (υ1* ) and υ 2 (υ 2* ) are the policy parameters of the inflation and output target determined by the monetary authority in country H ( F ).9. 9. In the following numerical analyses, we assume that the monetary policy authorities in the home and foreign countries implement the same policy parameters such that υ1 = υ1* and υ2 = υ 2* . 22.

(31) Under the monetary union regime, the common monetary authority sets the common interest rate ( i MU ) according to the union-wide economic situation, which prevails in the monetary union:. MU t +1. 1+ i. = (1 + i. ) (1 + i ). MU 1− ρ. MU ρ t.  Π tMU  MU Π.   . (1− ρ )υ 1.  Yt MU  MU Y.   . (1− ρ )υ 2. m exp(ε MU , t ).. (2.46). where i MU is the steady-state values of interest rates in the monetary union.. m ε MU , t is an i.i.d. monetary policy shock, and and υ1 and υ 2 are the policy parameters of the inflation and output target determined by the common monetary authority. Π tMU is the gross inflation rate in the monetary union as follows: Pt , Pt MU −1. 立. (2.47). 學. ‧ 國. Π tMU =. 政治大. MU. where Pt MU is the union-wide price index as a population-weighted geometric average of the CPI. (2.48). sit. y. Nat. Pt MU = Pt n ( Pt* )1− n .. ‧. in these two countries and is given by:10. n. al. er. io. In the same way, Yt MU is the union-wide level of output as a population-weighted geometric average of the levels of output in countries H and F : Yt. MU. n. * 1− n. = Yt (Yt ). .. Ch. engchi. i n U. v. (2.49). 2.2.5 Fiscal policy. The governments of these two countries conduct independent fiscal policies regardless of monetary policy implementations.. The government spending falls on both the tradable and. non-tradable goods, with the same composition of consumption goods. The levels of government expenditure on tradable goods GH , t and non-tradable goods G N , t are given by. 10. This definition is the model-equivalent of the Harmonized Index of the Consumer Price(HICP) of the Euro area. 23.

(32) GH , t = λGt ,. (2.50). GN , t = (1 − λ )Gt .. (2.51). where Gt is an exogenous government expenditure shock.. The country-wide government. expenditure follows an AR (1) process: Gt = Gtρ−G1 G 1− ρ G exp (ε tG ) .. (2.52). G where ρ G < 1 and ε t ~ N ( 0, σ G ) .. The government’s budget constraint can be written as: n. Pt Gt = Tt =  Tt (h )dh .. 立. 0. (2.53). ‧ 國. 學. 2.2.6. 政治大. Market Clearing. The market clearing conditions for tradable goods, non-tradable goods and labor are given by. ‧ er. al. n. Lt = LH , t + LN , t ,. io. YN* * , t = C N* * , t + GN* * , t ,. sit. YF*, t = CF , t + CF* , t + GF* , t , YN , t = C N , t + G N , t ,. (2.54). y. Nat. YH , t = CH , t + CH* , t + GH , t ,. Ch. engchi. L*t = L*F , t + L*N * , t .. i n U. v. (2.55) (2.56) (2.57) (2.58) (2.59). Finally, the asset market clearing condition requires that BF , t + BF* , t = nBF , t (h ) + (1 − n )BF* , t ( f ) = 0 .. 2.3. (2.60). Calibration. This section reports the procedure for the parameter settings used in solving the model. In order to avoid the effect of population size on the analysis and similar shares, population size n is set to 0.5 in both countries. First, we specify the degree of openness which was defined as the share of 24.

(33) the Home tradable goods in its aggregate consumption λ , and the share of the Foreign tradable goods in the Foreign aggregate consumption λ* , following the empirical studies by Lombardo and Ravenna (2014). From the results that they report, we divide the member countries of the Euro area into two groups based on the degree of openness. The countries with the degree of openness greater than or equal to 0.697 are classified as the high-openness country, and the countries with the openness lower than 0.697 are classified as the low-openness country.11,. 12. Within either group, we. use the GDP as the share to compute the weighted average of degree of openness, which is 0.7283 and 0.5897 for the high-openness and low-openness countries respectively. Therefore, we specify. 政治大 Furthermore, the shares of the Home tradable goods in the Home and Foreign 立 γ. the degree of openness of the high-openness and low-openness countries as 0.73 and 0.59 respectively.. and γ * , are assumed to be 0.57 and 0.43, respectively, to capture the. 學. ‧ 國. consumption bundles,. home bias in consumption, which is consistent with Eggertsson et al. (2014).. ‧. The subjective discount factor β is set to 0.99, which implies a 4% annual real rate in the. y. Nat. steady state. Following the estimation of Hansen and Singleton (1983), the coefficient of relative. commonly used in the New-Keynesian literature.. al. er. io. sit. risk aversion σ is set to 0.5. The inverse of the labor supply elasticity ϕ is set to 6, which is Based on Quint and Rabanal (2014), the. n. v i n elasticity of substitution between the C Home and Foreign tradable h e n g c h i U goods η elasticity of substitution between tradable and non-tradable goods. θ is set to 1.9, and the is set to 0.5, which is. consistent with Mendoza (1991). To ensure the stationarity of the net Foreign asset position, the transaction cost ψ B is set to 4 × 10−6 , as in Erceg (2006).. 11. Following the estimation of Lombardo and Ravenna (2014), Table 2.1 shows that the degrees of openness of Belgium, Austria, the Netherlands and Germany are more than 0.697 (the degree of openness of Portugal is equal to 0.697), which are classed as countries with a high degree of openness.. Conversely, the degrees of openness of. Spain, France, Italy, Greece and Finland are less than 0.697, which are classed as countries with a low degree of openness. 12. The share of high openness countries in the Euro area is about 43%. 25.

(34) As for the firm sector, we establish the probabilities of holding the price fixed in a certain period Θk equal to 0.66 which implies an average frequency of price changes of 3 quarters, which is consistent with the calibration of Eggertsson et al. (2014). The elasticity of substitution θ in sector k across regions is set to 6 (θ k = 6 ) , which implies a steady-state markup of 1.2. The share of government expenditure in GDP is set to 0.2, as in Rabanal (2009). In addition, we assume that both the productivity and government expenditure shocks follow an AR (1) process. The autocorrelation coefficient of productivity shock is set to 0.9, following Rabanal (2009). Based on the findings of Duarte and Wolman (2008), the autocorrelation coefficient of the. 政治大 policy parameters of the nominal 立interest rate rule υ , υ and. government expenditure shock is set to 0.42. Following Quint and Rabanal (2014), we set the 1. 2. Analyses. ‧. ‧ 國. 2.4. 學. respectively, which are assumed to be identical across countries.. ρ equal to 1.56, 0.2 and 0.8,. In this section, we will examine the effects of the openness differential on the economy’s. y. Nat. sit. response to shocks across monetary regimes. In Section 2.4.1, we outline the impulse response. n. al. er. io. analyses to the exogenous shocks to show how different degrees of openness may result in different. i n U. v. macroeconomic responses to shocks. In Section 2.4.2, we perform the robustness analysis. In. Ch. engchi. this study, we consider both the productivity shock and the government expenditure shock. There are two types of productivity shocks. One is the sector-specific productivity shock to sector k where k = H , N denotes the tradable and non-tradable sectors, respectively. The other is the country-wide productivity shock.. We assume a productivity shock of −1% with an AR (1). coefficient of 0.9. A government expenditure shock is also assumed to be −1% with an AR (1) coefficient of 0.42. 2.4.1 Differences in the degree of trade openness across regimes. To compare the impulse response analyses under different degrees of trade openness across regimes, we categorize the countries into two types. Following Lombardo and Ravenna (2014), 26.

(35) the degrees of openness ( λ and λ* ) are assumed to be 0.59 and 0.73 for the low-openness and high-openness countries, respectively. In all the Fig.s for the impulse response functions, the “blue line” denotes the Home country, the “red line” denotes the Foreign country, while the “solid line” denotes the monetary union regime, and the “dashed line” denotes the flexible exchange rate regime. 2.4.1.1 The productivity shock in the Home tradable sector Panel (a) in Fig. 2.2 plots the dynamic effect of a −1% productivity shock on the Home tradable sector in the low-openness country. Under the monetary union regime (solid line), a fall. 政治大 but also increases the Home inflation 立 and labor. A reduction in the Home consumption of the in the productivity of the Home tradable sector not only reduces the Home output and consumption,. ‧ 國. 學. Foreign tradable goods results in a decrease in the Foreign output. The Foreign inflation increases due to the rise in the prices of Home tradable goods. The interest rate rises due to higher inflation. ‧. and causes the intertemporal substitution effect which lowers the current consumption. The rise in. sit. y. Nat. inflation and interest rate lowers the Foreign consumption. The impulse responses of consumption. al. n. response of the Foreign output.13. er. io. and inflation are similar to those in Duarte and Wolman (2008), with the exception of the impulse. i n C [Insert h eFigure i U n g c2.2hhere]. v. On the other hand, under the flexible exchange rate regime (dashed line), a rise in the prices of the Home tradable goods brings about a trade deficit, which causes the Home currency to depreciate. The Home currency depreciation helps lower the price of the Home tradable goods, and helps increase the Foreign demand for the Home tradable goods which dampens the fall in the Home. 13. When we raise the elasticity of substitution between the home tradable goods and foreign tradable goods θ , home and foreign households will increase their consumption of the foreign tradable goods, which increases the foreign output. This result is consistent with Duarte and Wolman (2008). 27.

(36) output and consumption. The expenditure-switching effect from the Home currency depreciation, however, intensifies the decline in the Foreign output and consumption. This flexible exchange rate adjustment mechanism is absent from the monetary union. Thus, compared with the flexible exchange rate regime, the Home inflation rate and thereby the interest rate, which responds to the inflation rise, of the monetary union is higher, while the Foreign inflation rate and interest rate is lower. As a result, the absence of the Home currency depreciation, together with the intertemporal substitution effect of the higher interest rate, intensifies the decline in the Home output and consumption, but dampens the decline in the Foreign output and. 政治大. consumption. The monetary union regime widens the regional differential between the Home and Foreign countries.. 立. Furthermore, the effects of an adverse productivity shock may differ under different degrees of. ‧ 國. 學. openness. In panel (b) in Fig. 2.2, the shock occurs to the Home country with higher degree of. ‧. openness and leads to greater declines in output and consumption in the Home and Foreign. y. Nat. countries, and causes greater Home currency depreciation. Thus, the result suggests that if there is. er. io. sit. an adverse productivity shock to the tradable sector in the more open country, the loss of the Home country from joining the monetary union by abandoning the flexible exchange regime which helps. n. al. Ch. dampen the domestic impact, may be greater.. engchi. i n U. v. 2.4.1.2 The productivity shock in the Home non-tradable sector Panel (a) in Fig. 2.3 plots the dynamic effects of a −1% productivity shock to the Home non-tradable sector in the low-openness country. In the monetary union (the solid line), lower productivity in the non-tradable sector under sticky prices will lead to a greater demand for labor to offset the decline in productivity, which leads to a higher wage. As a result, the marginal cost of tradable goods production is higher, resulting in a lower production of tradable goods and overall production in the Home country. Thus, the income effect reduces the consumption demands for both the Home and Foreign goods, which results in lower Foreign output. The international 28.