This dissertation studies topics of international economics, such as the impact of US monetary policy on trade and finance in emerging market economies, impact of trade, migration and finance in influencing consumption across 50 states in the United States, and healthcare costs and choices in a developing economy (India). Each chapter of the dissertation approaches one of these three topics.

The first chapter investigates the role of US dollar as the dominant currency in world trade and finance and its impact on emerging market economies. In response to a U.S. monetary tightening, I show that exports of emerging market economies (EMEs) fall, contrary to the implications of standard open economy models. To explain this puzzle, I construct a DSGE model that incorporates two important aspects of the global economy; a large share of trade volumes among EMEs are denominated in US dollars and firms in EMEs borrow in US dollars. These key features of the model, along with imported inputs in production and financial frictions (a Bernanke-Gertler-Gilchrist style financial accelerator), lead to inefficient current account imbalances. In this paper, I assess the impact on the external balancing mechanism as propounded by Mundell Fleming model through a three-country general-equilibrium model with nominal rigidities, imperfect competition in production, dominant currency pricing and financing, incomplete and imperfect asset markets.

The second chapter examines how frictions in bilateral economic linkages shape the consumption pattern across economies. Using state-level data from the US, we find that the degree of bilateral consumption risk sharing across economies decreases in geographic distance. To explain this novel fact, we develop a DSGE model that incorporates trade, migration, and finance as channels of risk sharing which are subject to frictions that covary with distance. Calibrated to the US data, the model not only enables us to quantify the magnitude of the frictions in each channel, but also allows us to examine the interplay among the channels and disentangle their effects on the level, volatility, and comovement of consumption across states. Counterfactual analyses based on the model shed light on the design of macroeconomic policies that aim to reduce cross-region consumption disparity.

In the third and last chapter, we use survey data for 500 individuals from 10 villages distributed around the town of Nabha in Punjab, India, to examine patterns of healthcare choices. In particular, we examine the choice between government and private providers, and between medical professionals and informal practitioners. We also examine the joint choice of provider type and distance traveled, and possible factors influencing reported satisfaction levels with the care received. We construct a measure of anticipated treatment cost, and find that this variable, as well as reported cost-sensitivity, affects the choice between government and private providers. Our results have possible implications for policies with respect to the supply of healthcare options and their funding.

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.

In this paper, a simple search model of the labor market is combined with sticky prices to investigate the dynamic response of the economy to nominal interest rate shocks. The framework allows the respective roles of labor market search, nominal price rigidities, and policy inertia in accounting for the impact of monetary policy shocks to be studied. Labor market rigidities introduced by the process of matching job seekers with job vacancies amplify the real impact and reduce the inflation impact of a monetary policy shock. As a result, significantly less price rigidity is required; for example, the dynamic response of output and inflation in the new Keynesian model with a Walrasian labor market and only 15% of firms optimally adjusting prices each period can be replicated in the labor market search model when a more realistic 50% of firms optimally adjust their price each period.

This dissertation uses innovative methods to study different perspectives of macroeconomics. In particular, topics in this dissertation including macroeconomic modeling, computational technics, and empirical analysis.In the first chapter, I propose a numerical routine to approximate the radius of convergence (ROC) for perturbation methods. The classical issue of solving dynamic stochastic models with perturbation methods is that the solution only converges (to the true solution) locally over the state space. Moreover, such a convergence range is usually undetectable under current existing numerical methods. The proposed algorithm, in the limit, can approximate this range both necessarily and suciently. It resolves the diculty of assessing the appropriateness of perturbation solutions. This chapter makes two types of contributions. First, method-wise, the proposed algorithm is the first numerical routine on approximating the ROC of perturbation solutions. In addition, as shown in this chapter, the approximated ROC converges to the true value (no matter if it is analytically obtainable or not) as the order of the approximation increases. Second, modeling-wise, this algorithm provides two main insights on the real business cycle (RBC) model: (i) the perturbation method is capable of solving the standard RBC model; the ROC is large enough to cover most commonly used calibrations; (ii) models with recursive utility or stochastic volatility can not be solved appropriately by the perturbation method as the standard calibration for TFP volatility exceeds the ROC of value function on this dimension. In the second chapter, I try to shed light on the frontier research discussions around declining trends in business dynamism using a general equilibrium model structure with heterogeneous individuals. The key mechanism of the framework is the strategic technological innovation process of firms in response to an individual’s wealth holding and lifetime value of being in different occupations. Such an endogenous TFP process accompanies by wealth inequality reflects a firm’s relative technological position among other producers. The resulting ”winner takes all” dynamics help the model jointly account for several observed empirical trends of the U.S. economy. To accomplish this analysis, I adept a two-stage approach in my structural model. In the first stage, I run a comparative analysis to numerically show that multiple structural shocks are unnecessary to create stylized facts of declining business dynamism. As a consequence, for the second stage, I introduce the ”winner takes all” dynamics to the model and provide intuitions on the mechanism. I try to use both stages to emphasize the key role of the interactions between wealth inequality and firm-specific productivity growth in explaining the DBD facts during transitional dynamics. In the third chapter, I investigate whether the series of President Trump’s tweets had any effect on the stock market. In order to accomplish this, I divide this project into two separate parts. For the first part, I collect all president Donald Trump’s tweets from his Twitter database. I then run sentiment analysis on those tweets which contain content related to a particular company that is in the S&P 500 index. For the other part, I create a new routine for obtaining the abnormal daily return of stock indexes by time series forecasting. Combining both parts together, I test the main hypothesis that a tweet from President Donald Trump will significantly affect the stock price of the mentioned company. This chapter suggests only tweets with positive sentiment have significant effects on stock price movement. Moreover, such an ffect only lasts for about one trading day.

This paper surveys the implications of uncertainty for the design of monetary policy. Among the topics discussed are the impact of imperfect or noisy information on the performance of simple rules, the performance of rules that are robust to the exogenous disturbance processes, the effects of parameter uncertainty, and the implications of robust control. The analysis is conducted using a new Keynesian framework. One finding is that difference rules seem to perform well in the presence of imperfect information about the output gap.