Thesis advisor: Fabio Ghironi / Thesis advisor: Peter Ireland / This thesis includes three essays. The first chapter analyzes how the implications of productivity shocks in an open economy can differ depending on the size of the economy relative to the rest of the world. It employs a stylized two-country general equilibrium model with love of variety, where economies differ in size and shows that a dynamic home market effect is present: productivity shocks that lower production and entry costs lead to deterioration of home terms of trade when home is small relative to the rest of the word but to improvement of terms of trade when home is large. The second chapter analyzes the role of globalization in the lack of convergence of living standards within Europe, despite integration processes. Building on theoretical and empirical literature on trade and income inequality in the U.S. this chapter proposes a model that describes how globalization affects disparities between countries in Europe. To quantitatively assess this effect, a measure of exposure to globalization is constructed, using detailed trade, employment, and output data. The chapter shows that the relative performance of countries within Europe is correlated with their exposure to globalization. In particular, countries that experienced relative declines of living standards over the past decade have been most exposed to globalization. The third chapter explores the implications of demand side pricing complementarities and endogenous markups in open economy. It shows that endogenous markups resulting from translog preferences imply richer dynamics for international relative prices that have better chances to match the data. Further, countercyclical markups lead to endogenous procyclical movement as well as cross-country correlation of measured TPF. It also shows that in a stylized model endogenous markups may act as a transmission mechanism, leading in particular to positive GDP co-movement across borders as opposed to a benchmark CES model. / Thesis (PhD) — Boston College, 2015. / Submitted to: Boston College. Graduate School of Arts and Sciences. / Discipline: Economics.

This thesis investigates the contribution of productivity shocks at different aggregation levels to residential investment and relative house prices in ten local housing markets in Canada from 1986 to 2007. It has two major conclusions. First, while in BC, Ontario, and four Atlantic Provinces, residential investment is more likely to be affected by aggregate shocks, in Quebec and three Prairie Provinces, residential investment is less responsive to aggregate shocks, and more likely to be affected by region-specific shocks. Second, relative house prices are much more variable than residential investment, and largely depend on region-specific factors.

This dissertation consists of three independent essays in Macroeconomics. The first essay studies whether efficiency can be improved by introducing government-issued illiquid bonds to an economy where money is the only asset and essential. In contrast with perfectly liquid bonds, illiquid bonds can increase societal welfare in two ways: First, allocating consumption goods among heterogeneous agents more efficiently; second, stimulating consumption and output level by loosening the liquidity constraints of households. More importantly, since societal welfare is elevated persistently when the inflation rates range from a level slightly above Friedman Rule to an upper bound, this essay provides an insight into the essentiality of illiquid bonds. The second essay provides a novel propagation mechanism of productivity shocks to explain an empirical fact: The response curve of output to a positive productivity shock reaches its peak up to eight quarters after the shock. Using a micro-founded monetary search model and focusing on agents’ decisions on establishing long-term trading relationships in the goods market, I show that when a positive shock takes place in the economy, marginal agents break down previous trading relationships and explore better matching opportunities. As a result, shortly after the shock, the average productivity level of transactions increases, but the total number of transactions decreases. The calibrated model shows that the latter effect dominates, resulting a slightly decrease of aggregate output after a positive productivity shock. The search friction, together with the monetary channel, gives rise to a delayed output response at the aggregate level. The third essay develops a general equilibrium theory of household formation – i.e., marriage – following Coase’s theory of firm formation. Individuals in the model consume both market-and home-produced commodities, and home production is facilitated through marriage. Market frictions, including taxation, search and bargaining problems, increase marriage rates when home and market goods are substitutes. In particular, inflation, as a tax on market activity, makes household production and hence marriage more attractive, as long as singles use cash more than married individuals, which is supported by data. The prediction that inflation and other taxes affect household formation is also supported by evidence.

This dissertation consists of three independent essays in Macroeconomics. The first essay studies whether efficiency can be improved by introducing government-issued illiquid bonds to an economy where money is the only asset and essential. In contrast with perfectly liquid bonds, illiquid bonds can increase societal welfare in two ways: First, allocating consumption goods among heterogeneous agents more efficiently; second, stimulating consumption and output level by loosening the liquidity constraints of households. More importantly, since societal welfare is elevated persistently when the inflation rates range from a level slightly above Friedman Rule to an upper bound, this essay provides an insight into the essentiality of illiquid bonds. The second essay provides a novel propagation mechanism of productivity shocks to explain an empirical fact: The response curve of output to a positive productivity shock reaches its peak up to eight quarters after the shock. Using a micro-founded monetary search model and focusing on agents’ decisions on establishing long-term trading relationships in the goods market, I show that when a positive shock takes place in the economy, marginal agents break down previous trading relationships and explore better matching opportunities. As a result, shortly after the shock, the average productivity level of transactions increases, but the total number of transactions decreases. The calibrated model shows that the latter effect dominates, resulting a slightly decrease of aggregate output after a positive productivity shock. The search friction, together with the monetary channel, gives rise to a delayed output response at the aggregate level. The third essay develops a general equilibrium theory of household formation – i.e., marriage – following Coase’s theory of firm formation. Individuals in the model consume both market-and home-produced commodities, and home production is facilitated through marriage. Market frictions, including taxation, search and bargaining problems, increase marriage rates when home and market goods are substitutes. In particular, inflation, as a tax on market activity, makes household production and hence marriage more attractive, as long as singles use cash more than married individuals, which is supported by data. The prediction that inflation and other taxes affect household formation is also supported by evidence.