Essays on monetary policy in the Euro Area

The sequence of the essays in this thesis studies the differentials in inflation and output growth across the Euro Area countries and addresses the role of monetary policy in explaining these differentials. First I study the extent to which inflation and output growth differentials are explained by the propagation of common monetary policy interventions. Next, I evaluate the performance of the monetary authority in fulfilling the stabilization needs of the member countries when it aims to stabilize the aggregate economy. Lastly, I empirically evaluate a policy interest rule to determine the implicit weight the policymaker puts on the country-specific inflation and output growth differentials in addition to the aggregate.;The results show that monetary policy interventions do not generate significant differences in the inflation behavior across the countries, while they create significant differences in the output dynamics. Moreover, monetary policy innovations do account for a large portion of country-specific output fluctuations. This is in contrast to the business cycle literature where only a small fraction of output variance is attributed to the monetary policy shocks. In addition, it appears that while targeting the aggregate inflation and output dynamics, monetary authority stabilizes cross-country inflation in the face of idiosyncratic shocks fairly well, though there are considerable differences in the welfare losses associated with the cross-country output variability. Furthermore, country-specific inflation deviations are statistically significant in a Taylor type policy feedback rule, while the aggregate output gap and country-specific output gap differentials appear to be statistically insignificant.