This dissertation consists of two essays in international macroeconomics. The
first essay shows that optimal fiscal and monetary policy is time consistent in a
standard small open economy. Further, there exist many maturity structures
of public debt capable of rendering the optimal policy time consistent. This
result is in sharp contrast with that obtained in the context of closed-economy
models. In the closed economy, the time consistency of optimal monetary and
fiscal policy imposes severe restrictions on public debt in the form of a unique
term structure of public debt that governments can leave to their successors
at each point in time. The time consistent result is robust: optimal policy is
time consistent when both real and nominal bonds have finite horizons. While
in a closed economy, governments must have both nominal and real bonds,
and have at least real bonds over an infinite horizon to render optimal policy
time consistent.
The second essay uses a dynamic stochastic general equilibrium model to
theoretically rationalize the empirical finding that sudden stops have weaker
effects on outputs when the small open economy is more open to trade. First,
welfare costs of sudden stops are decreasing in trade openness. The reason
is that when the economy is more open to trade, the economy will have less
volatile capital, which leads to less volatile output. In terms of welfare, when
the small open economy is more open to trade, the welfare costs of sudden
stops will be smaller. Second, sudden stops may be welfare improving to the
small open economy. This is because when the representative household is
a net borrower in the international capital market, its consumption will be
negatively correlated with country spread. Since utility is a concave function
of consumption, it must be a convex function of country spread. That is, when
the country spread is more volatile, the mean utility is higher. The two findings
are robust: they hold with one sector economy model, and two sector economy
models with homogenous capital and heterogenous capital. In addition, this
paper shows that a counter-cyclical tariff rate policy is not welfare-improving. / Dissertation
| Identifer | oai:union.ndltd.org:DUKE/oai:dukespace.lib.duke.edu:10161/210 |
| Date | 10 May 2007 |
| Creators | Liu, Xuan |
| Contributors | Uribe, Martin, Kimbrough, Kent, Burnside, Craig, Schmitt-Grohe, Stephanie |
| Source Sets | Duke University |
| Language | en_US |
| Detected Language | English |
| Type | Dissertation |
| Format | 657714 bytes, application/pdf |
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