Essays on the Transmission of Unemployment and Monetary-Policy Shocks in the EU

Connectedness of Unemployment growth rates and GDP: I explain theoretically and empirically how connectedness and variability in the size of connected economies can explain the heteroscedasticity in their unemployment growth rates. Unemployment growth rates of countries in the European Union (EU) are positively correlated over time. I find that both the mean and variance of the cross-sectional distribution of the volatility of unemployment growth rates of countries in the EU are positively correlated over time with the variance of their cross-sectional size (GDP) distribution. I also document that the countries with smaller sizes have larger variances in their unemployment growth rates. I explain the transmission mechanism of shocks to unemployment growth rates from one country to another through a network model that can reproduce the above findings in data. I run simulations of this model to understand how the above relations change for different values of its parameters. A final contribution from this paper is to propose Okun's law for the cross-section in connected economies.

Role of Sovereign Credit Premium in Transmission of Monetary Policy: I analyze the impact of monetary policy shocks on the sovereign yield curve of major European economies and provide a decomposition of this yield curve response into term premia response, expected movement of short term rates, and sovereign credit spread response. I show that a small increase in short rates leads to larger movements in sovereign yield spreads across maturities which is mainly due to the reaction of both term premia and sovereign credit spreads. I explain the economic theory behind this observation. I discuss the effectiveness of Forward Guidance and Quantitative Easing as tools to influence monetary policy transmission across different maturities. Finally, I demonstrate the role played by sovereign credit spread in explaining the response of equity markets to monetary surprises.