Pisani, Massimiliano
(2006)
Nominal and financial frictions in international business cycle: A DSGE approach.
PhD thesis, London School of Economics and Political Science.
Abstract
In this thesis I address three stylized facts widely debated in international economics. The first is the positive correlation between macroeconomic volatility and degree of international financial openness in developing countries. The second is the huge and persistent increase in U.S. trade deficit. The third is the real exchange rate volatility, persistence and the disconnection with other macroeconomic variables. I investigate the three issues by elaborating three dynamic stochastic general equilibrium models. In the first chapter I develop a small open economy model to show how higher but imperfect financial integration can induce macroeconomic instability. The imperfect nature of financial integration is captured through a constraint on international borrowing, that affects expenditure decisions of private agents; the degree of financial openness is measured by the amount of borrowing for a given value of the collateral. In the second chapter I explain the deterioration of the US trade balance in terms of the positive collateral effect of increases in U.S. house prices on private consumption: I develop a model to reproduce the positive relationship - found by estimating a structural vector autoregressive model - between real estate prices, private consumption and trade balance deficit. The key feature of the model is a borrowing constraint, in which real estate is the collateral, that affects the consumption choices of U.S. households. In the third chapter I empirically investigate the determinants of the real exchange rate dynamics by estimating three new open economy macroeconomics models. I find that shocks to the uncovered interest parity and international price discrimination, due to local currency pricing and distribution costs, are crucial features to replicate the dynamics of the real exchange rate.
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