Recent economic events pose challenging questions for macroeconomists. The rising global imbalances raise the issue whether existing international macroeconomic models can explain the patterns observed in the data on real exchange rates and current accounts. The first chapter of this dissertation addresses the question whether a standard portfolio balance model can account for the long-run dynamic behavior of the real exchange rate and net foreign debt in the United States (US). The rest of the dissertation does not test how well theoretical models fit reality but uses models in order to understand reality better. The second and third chapters are motivated by the most significant economic event in the last decade-the US 2008 financial crisis. It triggered a major collapse in US real activity, called the Great Recession, and disrupted the job matching process in the labor market. The second chapter of this dissertation addresses the challenges faced by monetary policymakers in response to an increase in labor market frictions. Two striking features of the Great Recession are the speed and synchronicity with which real activity collapsed across the world. The third chapter analyzes how shocks such as the 2008 crisis are transmitted across countries. The findings of each chapter are briefly summarized in the following paragraphs.

A strand of models of the joint behavior of the current account, net foreign debt stock and the real exchange rate postulate that this behavior is driven by saddle-path dynamics and the related portfolio balance effect. This saddle-path dynamics is based on the assumption that domestic and foreign assets are imperfect substitutes and that the financial markets clear before the goods markets. Chapter 1 uses the Johansen test for cointegration to check the prediction of a portfolio balance model that the net foreign debt stock and real exchange rate display saddle path dynamics. Newly constructed quarterly series on the face value of the United States net foreign debt as a percentage of nominal GDP, together with data on the broad real effective exchange rate index of the United States Dollar, are analyzed. The results indicate that the US net foreign debt and real exchange rate are cointegrated and do not display saddle path dynamics. The cointegrating relationship is found to be negative and trend-stationary. These empirical results suggest that a richer framework that incorporates the dynamic behavior of relative asset supplies is more appropriate for interpretation of the joint dynamics of the US net foreign debt and real exchange rate.

In chapter 2 I build a dynamic stochastic general equilibrium model with search and matching frictions in the labor market and analyze the optimal monetary policy response to an outward shift in the Beveridge curve. The main finding is that the optimal monetary policy depends on the shock that causes the shift. A fall in the efficiency of matching does not cause an increase in the unemployment gap; the optimal response of the central bank is to stabilize inflation. An increase in the elasticity of employment matches with respect to vacancies presents the policy maker with a trade off between stabilizing inflation and unemployment. The optimal policy response to the efficient labor market shock changes when real wages are sticky but remains unchanged when home and market goods are imperfect substitutes, compared to the case when they are not. When contrasted to a Taylor rule that targets inflation and output growth, the optimal monetary policy is more aggressive in pursuit of its objectives.

Chapter 3 is a joint effort with Abigail Hughes from the Bank of England and explores how financial factors affect the international transmission mechanism. We look at how financial frictions affect the international transmission of country specific productivity shocks. We then explore how two types of shocks that affect the external finance premium are propagated across countries. We build a two country DSGE model with financial frictions to explore the size and nature of international spillovers. Our main findings are that financial frictions magnify movements in international relative prices. In addition, external finance premium shocks can generate significant and persistent international spillovers but they depend on the type of shock. A shock to the dispersion of the productivity of entrepreneurs results in a shift in the foreign aggregate supply curve. A shock to the survival probability of entrepreneurs generates a shift in the foreign aggregate demand curve.

Deep de-carbonization of the electric power sector is indispensable to achieving climate change mitigation. This work explores how aggressive reductions in electricity sector emission levels can be achieved, what the associated costs would be, and how these costs may be minimized. Integrating increased levels of intermittent renewable energy sources into the electricity grid poses new challenges to system planning, operation, and reliability, increasing the need for models that can merge the capabilities of capacity-expansion and production cost simulation models.

I describe the operational detail I have incorporated into the long-term investment framework of the SWITCH model to allow for more accurate evaluation of both the potential contribution of intermittent renewable technologies to electricity decarbonization and the associated system flexibility requirements. I have implemented a series of enhancements to the model's treatment of system operations and generator types -- the SWITCH "system flexibility module" -- in order to simulate unit commitment as realistically as possible, at an unprecedented resolution for a capacity-expansion model of a large geographic area, offering some of the most detailed treatment to date of day-to-day system operations in an investment model.

I run a range of scenarios to explore the effect of various sources of uncertainty for system development between present day and 2050 in the Western Electricity Coordinating Council (WECC). I include sensitivities for technology costs, fuel prices, technology availability, demand profile, and availability and cost of system flexibility options. I find that meeting a carbon emissions reduction target of 85 percent below 2050 levels is feasible across a range of assumptions. The cost of achieving the goal is highly uncertain, but a number of opportunities to contain costs exist. In the 2030 timeframe, lowering the cost of solar technologies to the SunShot target is the main cost-reduction strategy. Achieving the ARPA-E battery cost target has a small impact on system costs through 2030, as other sources of flexibility are available to the system, including gas generation, hydro, and CAES. The price of natural gas is key to its utilization in the 2030 timeframe, but is not an important driver in 2050 when natural gas flexibility is of high value yet fuel use is limited by the carbon cap.

Solar PV deployment is the main driver of CAES and battery storage deployment: its diurnal periodicity results in opportunities for daily arbitrage that these technologies are well suited to provide. Storage operation is very different from present day patterns - storage tends to charge during the day when solar PV is available and discharge in the evening and at night. Similarly, the ability to shift loads to the daytime solar peak could have cost-reduction benefits for the system. Wind output exhibits large seasonal variations; because it can remain at very low (or very high) levels for extended periods of time, it does not benefit from CAES and battery storage (operating as providers of daily arbitrage) as much as solar PV does, and instead requires storage with a large energy subcomponent.

CSP with thermal storage is an important component of the 2050 power system, but it directly competes with the combination of solar PV and batteries. If low solar PV costs and low battery costs are achieved, the two technologies may be deployed at large-scale, displacing CSP with thermal storage. The combination of SunShot solar technology and advanced battery technology has the largest impact on total storage capacity deployment in 2050. This combination can provide substantial savings through 2050, greatly mitigating the cost of climate change mitigation and outperforming the nuclear-dominated scenario given the costs assumed here.

Policy goals for storage deployment should incorporate both the power subsystem component and the energy subsystem component of energy storage. In addition, storage deployment requirements should be set as part of overall system development goals as system flexibility needs will vary depending on the rest of the grid mix. Policy ought to be technology-neutral and support a comprehensive portfolio of system flexibility options, allowing flexible generation, demand response, and flexible electric vehicle charging, which can provide comparable services, to compete with storage on a level playing field. The increase in system flexibility requirements can be managed through a system-wide approach including regional cooperation to strategically plan for transmission interconnection and geographic diversity of renewable resource deployment to mitigate the variability of overall output. System-level planning is critical to ensure that appropriate incentives are put in place for all grid assets to fully recover their costs and justify investment while providing the most value to the system and ensuring cost-effective system development over time.