Essays on macroeconomic policy and its impact on the small open economy

Abstract

This thesis develops the small open economy DSGE model and applies Bayesian methods in order to investigate the implications of macroeconomic policy in the face of a number of challenges.In chapter 2, we construct a small open economy DSGE model with non-tradablegoods and intermediate sectors under complete financial markets, and identify relative home producer price effects in the dynamics of main variables and optimal allocation. Also, by embedding intermediate sectors, we identify linkages between final and intermediate sectors.In chapter 3, we incorporate financial frictions and a global banking system in a small open economy DSGE model. We show that credit policy appears to be powerful in response to a negative leverage shock since an expansionary monetary policy shock leads to severe costs of capital flight, inflation and a sudden drop in deposits. However, when there is a negative capital quality shock, an expansionary monetary policy shock appears to be more effective than credit policy through lower real interest rates and a sharp depreciation of the terms of trade and the real exchange rate.In chapter 4, we estimate a model with financial frictions and global banking system for Korea and the U.S. using a Bayesian approach. We show that the main driving forces of business cycle fluctuations differ between countries, and that there are substantial frictions in the global banking sector. Therefore, a model analysis and macroeconomic policy without heterogeneous characteristics of each economy and frictions in global banking sector would be severely misleading.

Date of Award	12 Oct 2016
Original language	English
Awarding Institution	University of Bath
Supervisor	Christopher Martin (Supervisor)