Cross-country heterogeneity and time variation in the euro-area economies: investigation using VAR methods

This thesis investigates the monetary transmission mechanism in the Euro area, for countries taken individually and as an aggregate. The focus of the thesis is on the effects of monetary policy shocks on the area as a whole, across countries and over time during the period of single monetary policy by the Eurosystem. Using the mostrecent empirical techniques such as factor-augmented vector autoregression (VAR), Bayesian Gibbs sampling, rolling windows, data pre-screening and panel VAR, the thesis investigates a novel (large) data set for the economies of the Euro area. According to our empirical analyses utilising these techniques, the thesis reaches the following main conclusions: First, time variation in the impulse responses of area-wide consumer prices and monetary aggregates to monetary policy shocks is stronger than that of other key macroeconomic indicators. The contractionary impact of the monetary tightening on real activity is the strongest when it hits the economy during the global financial crisis period (Chapter 1). Second, although the effects of the policy shocks on national real activities and price levels are homogeneous across countries, the transmission mechanism displays important cross-country heterogeneity with the national monetary aggregates responding most heterogeneously to common monetary policy shocks (Chapter 2). Finally, despite the responses of the Eurosystem to the global financial crisis with unconventional monetary measures, country-specific factors such as defaults risks and bailouts played a significant role in disrupting the transmission of the policy actions to individual economic activities (Chapter 3)