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Essays in International Macroeconomics

by Liu, Xuan

Abstract (Summary)
This dissertation consists of two essays in international macroeconomics. The

first essay shows that optimal fiscal and monetary policy is time consistent in a

standard small open economy. Further, there exist many maturity structures

of public debt capable of rendering the optimal policy time consistent. This

result is in sharp contrast with that obtained in the context of closed-economy

models. In the closed economy, the time consistency of optimal monetary and

fiscal policy imposes severe restrictions on public debt in the form of a unique

term structure of public debt that governments can leave to their successors

at each point in time. The time consistent result is robust: optimal policy is

time consistent when both real and nominal bonds have finite horizons. While

in a closed economy, governments must have both nominal and real bonds,

and have at least real bonds over an infinite horizon to render optimal policy

time consistent.

The second essay uses a dynamic stochastic general equilibrium model to

theoretically rationalize the empirical finding that sudden stops have weaker

effects on outputs when the small open economy is more open to trade. First,

welfare costs of sudden stops are decreasing in trade openness. The reason

is that when the economy is more open to trade, the economy will have less

volatile capital, which leads to less volatile output. In terms of welfare, when

the small open economy is more open to trade, the welfare costs of sudden

stops will be smaller. Second, sudden stops may be welfare improving to the

small open economy. This is because when the representative household is

a net borrower in the international capital market, its consumption will be

negatively correlated with country spread. Since utility is a concave function

of consumption, it must be a convex function of country spread. That is, when

the country spread is more volatile, the mean utility is higher. The two findings

are robust: they hold with one sector economy model, and two sector economy

models with homogenous capital and heterogenous capital. In addition, this

paper shows that a counter-cyclical tariff rate policy is not welfare-improving.

Bibliographical Information:

Advisor:Uribe, Martin; Kimbrough, Kent; Burnside, Craig; Schmitt-Grohe, Stephanie

School:Duke University

School Location:USA - North Carolina

Source Type:Master's Thesis

Keywords:business cycles welfare time consistency optimal fiscal and monetary policy

ISBN:

Date of Publication:05/10/2007

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