Regional Effects Of The Single Monetary Policy Of The Euro Area

Founded in1999, Euro-zone created the world’s first regional monetary union,which has been a research focus in the field of international finance since then. Theoutbreak of the European Sovereign Debt Crisis exposed the deficiency of Euro-zonemonetary policy. When faced with asymmetric shocks, single currency is difficult tosatisfy the needs of all member countries. Different countries have different responsetowards unified monetary policy shocks. The effectiveness of Euro-zone monetarypolicy is exposed to unprecedented challenge. Under this background, this thesisfocuses on the regional effects of Euro-zone monetary policy.In the theoretical analysis part, the thesis firstly uses test standards in OptimumCurrency Area Theory to analyze the economic differences within the Euro zone. Theresults show that the Euro-zone basically satisfies the criteria of economic opennessand the similarity of inflation rate. However, the Euro-zone doesn’t satisfy theliquidity of production elements and the policy integration. Therefore, the Euro-zonehas yet to meet the ideal basis of monetary cooperation and it has great possibility ofregional effects of monetary policy. Secondly, the thesis uses monetary policytransmission mechanism theory to explore the reasons of regional effects. The resultsshow that the euro area monetary policy influences the economy of member countriesthrough the combination of interest rate channel, credit channel and exchange ratechannelsIn the empirical analysis part, this thesis constructs VAR model, using unit roottest, cointegration test, impulse response function and variance decomposition toverify the different response of11member countries’ output and price level towardsthe shocks of monetary policy intermediary variables--short-term interest rates and thebroad money supply. The results show that there exist strong regional effects ofmonetary policy in Euro-zone. The member countries’ capacity to absorb impact ofmonetary policy varies. The digestion ability of monetary policy impact is stronger inwealthy countries.Based on the above analysis, this thesis gathers up the main findings and drawsthe final conclusions. The thesis proposes that improving regional economichomogeneity and promoting economic integration is the fundamental way toeliminating the regional effects of monetary policy. Establishing a unified fiscal unionis the key to solving the problem of “Dual Structural Contradiction” in Euro-zone. Moreover, establishing the existing mechanism for member countries is easier toimplement in order to reduce the regional effect of monetary policy.