Book Description

This dissertation research puts a focus on small open economies, whose policies do not affect world prices and interest rates. In the first chapter, it is shown that recent Canadian data from 2001 to 2013 feature a notable procyclical trade balance, which contrasts with the countercyclical trade balance in 1981-2000. By using a dynamic small open economy model built based upon Mendoza's (1991) framework, driven by correlated domestic productivity shocks and world credit spread shocks, I can generate the observed trade balance pattern in the pre-2000 and post-2000 periods. In addition, my analysis shows that the world credit spread shocks explain a large portion of the considerable change in the cyclicality of trade balance, and that the low world real risk-free interest rate after 2000 partially accounts for the procyclical trade balance in the same time period. Applications of the model to other developed small open economies, such as Australia and New Zealand, yield similar results, suggesting that the world credit spread shocks have an impact on macroeconomic dynamics and help improve model performance. The second chapter concerns an innovative exchange rate policy implemented by the Reserve Bank of Australia (RBA). From 2013 to mid-2015, in order to achieve balanced economic growth, the RBA tried to bring down the Australian dollar by presenting public speeches and monetary policy statements that expressed a strong preference for a lower exchange rate, which is known as jawboning down the currency. To investigate the effectiveness of the central bank's jawboning strategy, I analyze the Australian economy with a structural vector autoregressive (SVAR) model, in which the Exchange Rate Stance Index (ERSI) is constructed to measure the magnitude of jawboning. The empirical results show that an unanticipated increase in the ERSI, which is equivalent to strengthened jawboning by the RBA, will lead to a significant and lasting fall in the real exchange rate. However, the ERSI shock fails to improve GDP over the medium term, suggesting that the jawboning strategy is not an effective exchange rate policy tool to boost GDP growth. The third chapter investigates how the global and local financial shocks would contribute to the large fluctuations of the unemployment rates in the emerging markets. We use a panel structural vector autoregressive (VAR) model to analyze monthly data from six emerging countries between 1999 and 2015. The results show that the local financial risk factors, including the country spread and the dividend yield, account for a larger portion of unemployment movements than the global financial risks, including the U.S. risk-free real interest rate and the global financial risk proxied by the U.S. Baa corporate spread.