There are two key observations in international macroeconomics which pertain to output
and real exchange rate dynamics. First, fluctuations in national output around its long-run
growth path are very persistent. Second, fluctuations in real exchange rates are very
persistent. The sticky price framework offers an explanation for both phenomena. The
first and second essay of this thesis take an empirical approach to test the predictions of
this framework.
In the first essay I test the prediction of the sticky price model for output dynamics
using annual IFS data on 51 countries over the period 1950 -1996. The model predicts that
price stickiness should be less important in high inflation countries and therefore output
fluctuations less persistent. I find that, this inverse relationship is statistically insignificant
in the international data. A similar result holds for OECD countries. In the empirical
implementation I explicitly control for the within-country time variation in inflation by
first characterizing the inflationary environment using the long-run movements in inflation
(trend inflation), and secondly, by excluding episodes of hyperinflation. The analysis shows
that when the within-country time variation in inflation is ignored, there is support for
the prediction. For instance, the inverse relationship between persistence in deviations of
output from its long-run growth path and average inflation is statistically significant in
the full sample. However, the exclusion of a few episodes of hyperinflation renders this
relationship statistically insignificant.
In the second essay I investigate the prediction of the sticky price model for real exchange
rate dynamics using annual IFS data on 49 countries over the period 1972-1996.
The model predicts that deviations of real exchange rates from purchasing power parity
should be less persistent, in high inflation countries. The empirical analysis reveals that
the support for such an inverse relationship is extremely fragile. In particular, eliminating
episodes of hyperinflation renders this relationship statistically insignificant.
The lack of evidence in favour of the two predictions of the sticky price model is problematic
since this model is extensively used as a microfoundation for understanding output
and real exchange rate fluctuations.
In the third essay I take a structural approach to qualitatively explore the role of slow
diffusion of new products in propagating the effect of technology shocks on output. I
present a multi-sector dynamic general equilibrium model in which the creation of new
products requires real resources. These products are beneficial for the economy but only
upon complete diffusion. However, this diffusion is not instantaneous. I find that relative
to a model in which there is instantaneous diffusion of new products, the qualitative
output dynamics are similar to what is observed in the U.S. data. This warrants further
quantitative investigation.
| Identifer | oai:union.ndltd.org:LACETR/oai:collectionscanada.gc.ca:BVAU.2429/10813 |
| Date | 05 1900 |
| Creators | Khan, Hashmat Ullah |
| Source Sets | Library and Archives Canada ETDs Repository / Centre d'archives des thèses électroniques de Bibliothèque et Archives Canada |
| Language | English |
| Detected Language | English |
| Type | Electronic Thesis or Dissertation |
| Relation | UBC Retrospective Theses Digitization Project [http://www.library.ubc.ca/archives/retro_theses/] |
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