Essays in theoretical and applied macroeconomics

This thesis includes three independent essays in the fields of macroeconomics, monetary economics and international finance. In the first essay, I build a new Keynesian DSGE model to examine the implications for monetary policy of household production. The proposed theory helps reconcile the relatively strong response of output to monetary policy shocks as suggested by VAR-based evidence and the low degree of price rigidity found in micro data. The second essay analyzes the role of structural transformation (the reallocation of labor across sectors overtime) in shaping the volatility of aggregate output across countries. Finally, the third essay illustrates the importance of trade patterns in choosing between a single currency peg and a peg to a composite basket of currencies. “Household Production, Services and Monetary Policy” (Chapter 1) builds on the observation that consumer services (unlike consumer nondurable) have close substitutes at home. Households may therefore switch between consuming home and market service as the real wage (the opportunity cost of working at home) changes. To study the implications of this arbitrage for monetary policy, I embed a household sector into an otherwise standard two-sector (a nondurable good sector and a service sector) new Keynesian DSGE model. The fact that households are able to produce services at home makes service sector’s firms more reluctant to change their price. This translates into an extra endogenous shift term in the new Keynesian Phillips that is increasing with the extent of substitutability between home and market services. This increased nominal rigidity endogenously amplifies the output response to monetary policy shock, especially in the service sector, which is consistent with VAR-based evidence in the paper that consumer services are more interest-rate sensitive than consumer nondurables. “Structural Transformation and the Volatility of Aggregate Output: A Cross-country Analysis” (Chapter 2) is based on the evidence of a negative relationship between the employment share of the service sector and the volatility of aggregate output, which I obtain after controlling for several factors (including the level of financial development). This aggregate result is driven by sectoral labor productivity differentials: Labor productivity is substantially more volatile in agriculture and manufacturing than in services. Aggregate output would therefore become mechanically more stable as labor shifts away from agriculture and manufacturing, and toward the service sector. To quantify this conjecture, I first calibrate a model of structural transformation (secular reallocation of labor across sectors) to the U.S. economy, which I use to match the time path of labor shares in agriculture, manufacturing and services across OECD countries. The model is subsequently used to conduct a set of counterfactual experiments in which labor is endogenously constrained from moving across sectors. Computations suggest that the shift of labor toward the services sector is indeed volatility-reducing. “Exchange Rate Volatility under Alternative Peg: Do Trade Patterns Matter?” (Chapter 3) is a contribution to the literature on the choice of exchange rate regimes. I use monthly bilateral exchange rate and external trade data from 1980 to 2010 for the member countries of the Western African and Monetary Union (WAEMU). These countries have their common currency (the CFA franc) pegged to the French franc since the mid-40s and to the euro since its introduction in 1999. At the time of the initial peg arrangement, France accounted for most of the external trade of WAEMU countries. Since then, and more notably since the early 2000s, the trade patterns of these countries shifted briskly away from France and other Euro area countries and towards the BICs (China in particular). The chapter finds that a peg to a composite basket of currencies would have led to a less volatile effective exchange rate over the last decade compare to the current hard peg. This chapter, however, does not derive an optimal exchange rate for WAEMU countries, which is an important area for further research.

Keyphrases: Services, Biens non-durables, Household production, Services, Nondurable goods, New-keynesian Phillips curve, Structural transformation, Output volatility, Sectoral chocs, Labor productivity, Trade patterns, Fixed exchange rate