Title: Essays on Open Economy Macroeconomics
Description: This Ph.D. dissertation contains three essays on Open Economy Macroeconomics. The first chapter investigates monetary policy problem of emerging economies known as the Tosovsky Dilemma, which says that when an emerging economy experiences a boom associated with capital inflows and exchange rate appreciation, it is not appealing to tighten monetary policy to counteract inflationary pressures as this might further exacerbate inflows and appreciation. In the chapter, I develop an intertemporal general equilibrium framework of the monetary transmission mechanism to investigate how this dilemma shapes optimal monetary policy. In the model, financing is decentralized and collateralized by physical capital, which is nontradable and costly to adjust over time. The Dilemma materializes when there is a positive external shock that increases capital inflows and generates real exchange rate appreciation and inflation in the nontradable sector, all of which are inefficient. Contrary to conventional wisdom, the Ramsey optimal monetary policy calls for lowering the policy rate in such circumstances in order to suppress capital inflows and appreciation, while accepting inflation in the nontradable sector.

If the capital flows can be controlled by an additional policy instrument, then optimal policy becomes countercyclical, as in the conventional framework without the Dilemma. The second and third chapters focus on dynamics of labor shares over the business cycles in small open economies. The second chapter uses annual labor shares data of 40 years for 35 small open economy countries and finds three empirical regularities. First, labor shares are not constant, but they are as volatile as output. Second, labor shares in emerging economies are about twice as volatile as labor shares in advanced economies. Third, labor shares in emerging economies are procyclical on average, whereas they are countercyclical in most advanced economies. The empirical findings offer a skeptical view of the conventional beliefs about the unitary elasticity of substitution between capital and labor, and countercyclical labor shares in the short-run. The third chapter paper builds a theoretical model which can comprehensively explain the empirical findings in the second chapter.

The model is a dynamic stochastic general equilibrium, small open economy, composed of tradable and nontradable sectors with CES production functions. In the model, there are two margins of labor share fluctuations over the business cycles, which are fluctuations of the capital-labor ratio in each sector and fluctuations in the relative value of sectoral production. The estimated models show a countercyclical labor share and volatility near that of output in Canada, and procyclical and excessively volatile labor share in Mexico, all of which are in line with the data.