Essays in international finance and macroeconomics.

Abstract

This dissertation is a collection of essays in international finance and macroeconomics. In the first chapter I present a two-country model with sticky prices that reproduces the volatility and comovement of international relative prices for the U.S. The model nests two alternative assumptions about the currency denomination of trade: firms set prices either in the local currency of the market where the goods are sold (LCP), or in the currency of their own country (PCP). These assumptions have important implications for the international transmission of monetary shocks, as only PCP allows for nominal exchange rates to have expenditure-switching effects. I present two results. First, when the elasticity of substitution between domestic and foreign traded goods is low, the performance of the model under complete PCP is better than under complete LCP. Second, the version of the general model that best matches the data is one where two-thirds of firms follow PCP. The second chapter reassesses the empirical evidence on the macroeconomic effects of shocks to government spending. Unlike previous academic work I estimate a semi-structural VAR under the identifying assumption that nominal (rather than real) government purchases are predetermined in the short run, and I review institutional features of the U.S. budgetary process that support this assumption. I find that government spending has no effect on consumption, and that output multipliers are considerably lower than those previously estimated. These results are robust to alternative specifications of the VAR. The third chapter evaluates the ability of a standard neoclassical model to reproduce the effects of large military buildups on the U.S. economy. I study the model's dynamics under alternative assumptions about the information set available to the representative agent. The model's quantitative performance is substantially improved when the representative agent is not fully aware of the persistence and magnitude of the increase in government purchases associated with the buildup.