Essays in International Economics and Macroeconomics with Frictions

Abstract

This collection of essays investigates the role of frictions in Macroeconomics and International Finance. In the first chapter, we propose a standard international economy model in which a foreign investor has a wedge of return when investing in the domestic economy if compared to the domestic investor. This wedge helps explaining the major patterns of nominal exchange rate, real exchange rate, low correlation of consumption and the forward premium puzzle. We provide three structural interpretations within the class of models that has such wedge: capital controls, debt constraints and noisy agents. By disciplining the models with further data, we find that noisy-induced models are the most promising. In Chapter 2, co-authored with Wei Cui, we provide a Ramsey approach for optimal monetary policy in a model with equity issuance and resaleability constraints with conventional and unconventional policies as instruments. We show that entrepreneurs hold too much liquid asset and, in responding to liquidity shocks, the paths of macroeconomic variables under no policy and optimal policy are sharply different and suggest the need for changing the rate of return on liquid assets. Finally, we prove that the unconventional policy dominates the conventional counterpart, but, quantitatively, the welfare difference of them is negligible. In Chapter 3, we provide an information-based explanation for the existence of nominal rigidity in prices in which we stress the conflicts and the information revelation within the firm. Even if shocks are continuously distributed and there is no observation or menu costs, prices assume only a finite number of values. The mechanism can match already documented micro data moments, such as reference/sales prices, as well as newly-provided data from supermarket brand products and the behavior of sales and length of a price spell. The information-based explanation is fully tractable and we exemplify it by introducing it in a general equilibrium model to study the effects of monetary policy under such environment.