Three Essays in International Macroeconomics: An Investigation of Macroeconomic Puzzles, International Trade and Financial Frictions

Abstract

In this thesis I examine three aspects of international macroeconomics.

In the first chapter I re-examine four prominent puzzles of international macroeconomics in light of contemporary data, analysing whether the data patterns underlying these puzzles still exist today. As these data patterns are frequently used as validation mechanisms for models of international trade, this is important to ensure models yield output in line with up-to-date data. The key contributions of this chapter are as follows. First, I illustrate that greater awareness of the fact that stylised facts can change over time and differ across country groups is important. Second, to account for the heterogeneity of data patterns across country-groups, models need to include mechanisms that are appropriate for the countries that are being modelled.

The second chapter studies the role resource allocation plays for the dynamic response of labour productivity to various macroeconomic shocks in a DSGE model of international trade. Two main results emerge. First, capital introduces an element of persistence into the economy. Second, when firms can adjust their employment of labour and capital in response to macroeconomic shocks and enter and exit the domestic economy endogenously, the response of labour productivity is driven by the interaction of resource allocation and endogenous selection into domestic production. This reverses the initial response of labour productivity to an aggregate technology and a trade shock relative to the model with only labour as a factor of production.

In the third chapter I examine the effect of financial frictions in a two-country DSGE model of international trade, finding that they amplify the response of the model economy to macroeconomic shocks. I then analyse the extent to which trade affects the amplification effect of financial frictions and find that international trade dampens their effect.