In the IS-LM framework, when the CB expands Money supply, interest rates are driven down, investment is boosted, and aggregate output increases (shift of LM curve, movement along IS curve). In the case of the Eurozone, given that member countries are not able to unilaterally expand money supply- this is the mandate of the ECB- it is often said that there is no monetary independence. However, interest rates in different European countries are different. I have two questions:
i) Even though the currency is the same, the interest rates are different. Would a risk premium be the only explanation for the interest parity condition not holding here (there is no risk of devaluation for the same currency)?
2) The Central bank of each country has no power over the money supply. However, the yields are still different. Is this purely a result of market forces (again determined by differences in risk?)?
In a broader sense, what is the role of the European network of central banks when they can't control the Money supply ? (the main purpose of existing for most central banks).