The Business Cycle Aspect of Monetary Unions: DSGE and Empirical Analysis for the Czech Republic and the Euro Area

This dissertation examines the implications of the Czech Republic adopting the euro, focusing on the business cycle aspect through Dynamic Stochastic General Equilibrium (DSGE) models and empirical analysis of Czech and Euro Area business cycles. A New Keynesian two-country DSGE model specific to the Czech Republic and Euro Area is developed to assess the welfare consequences of the common monetary policy. The model's results indicate welfare losses from adopting a common monetary policy, driven by increased inflation rate volatility, while empirical analysis shows minor differences but overall similar real business cycle properties between the two economies. Although the model implies that euro adoption would be welfare decreasing, it is important to consider other economic and political criteria in the decision-making process of the potential euro adoption. To mitigate the losses, the important policy steps include improving the quality of fiscal policy to compensate for the loss of an independent monetary policy, diversifying the economy, and managing public sentiment through effective information campaigns.