I think the first thing to consider is your company's security and governance policies when implementing Monarch Server. Once you have projects and/or models that are ready for production, you want to keep that version (or state) secured from unwanted changes. Therefore, it would be safe to put it in a location where only the Monarch Server and Monarch Server admin has access to it. Monarch Server has this feature where you can upload project/model to the Server Library. If you don't want to upload it in the Monarch Server database, then you can put it in the Monarch Server local directory where other users do not have access.
For the output files, it can stay in the Server local directory as Monarch Server has this distribution feature where it can send the output files to certain people via email.
Of course, I would still suggest you discuss implementation with the Professional Services of Datawatch as they have extensive experience on implementing Monarch Server and best practices.
Hope this helps.