Monetary policy coordination between the United States and the Euro Area - an application of indirect inference to a two-country DSGE model

Hong, Yuqun 2013. Monetary policy coordination between the United States and the Euro Area - an application of indirect inference to a two-country DSGE model. PhD Thesis, Cardiff University. Item availability restricted.

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Abstract

Calls for monetary policy coordination has increased as the intensifed macro- economic interdependence cultivates the conflict of interests between economics, especially following the current crisis. Yet the literature has not reached a con- sensus on whether monetary policy coordination is welfare-improving. This thesis, taking from another perspective, assesses the real-world existence and extent of monetary policy coordination associated with economic interdepen- dence between the United States (US) and the Euro Area (EA), and investigates the changes of international transmission in the presence of coordination. Monetary policy coordination is represented by direct responses of monetary policy instruments to contemporaneous and lagged values of the real exchange rate. By using the method of indirect inference, this research also incorporates historical data into in-sample evaluation and estimation of the 'Dynamic Sto- chastic General Equilibrium'(DSGE) model. Beginning with indirect inference evaluations of a two-country DSGE model of the US and EA, it is found that models with coordination generally outperform their non-coordination counterpartindicating the existence of coordination. The real exchange rate is the essence of such improvement in the model's efficacy; and it is shown that coordination models have an excellent ability to replicate real exchange rate dynamics and volatility relative to a non-coordination model, even though it still remains a source of relatively poor performance of model. By applying an extensive indirect inference estimation, the existence of mon- etary coordination is ascertained since a partial-coordination model outstrips the non-coordination model remarkably. Both the US and EA economies exhibit moderate to high levels of monetary coordination. Such features improve the model's performance; particularly in terms of dynamics of US time series, volatil- ity of EA time series and both dynamics and volatility of the real exchange rate. Impulse responses and variance decomposition reveal substantial cross-country spillovers in contrast to the non-coordination model case. ii

Item Type:	Thesis (PhD)
Status:	Unpublished
Schools:	Business (Including Economics)
Subjects:	H Social Sciences > HB Economic Theory
Date of First Compliant Deposit:	30 March 2016
Last Modified:	01 Feb 2017 04:34
URI:	https://orca.cardiff.ac.uk/id/eprint/57140

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