Essays On Exchange Rate Volatility And On Regional Integration PDF Download

"In Chapter 1, we present and study the properties of a sticky information exchange rate model where consumers and producers update their information sets infrequently. We find that introducing inattentive consumers has important implications. Through a mechanism resembling the limited participation models, we can address the exchange rate volatility for reasonable values of risk aversion. We observe more persistence in output, consumption and employment which brings us closer to the data. Impulse responses to monetary shocks are hump shaped, consistent with the empirical evidence. Forecast errors of inattentive consumers provide a channel to reduce the correlation of relative consumption and real exchange rate. However, we find that decline in the correlation is quantitatively small. Chapter 2 explores the international business cycle implications of replacing the sticky price assumption with sticky information. We assume attentive consumers through this exercise. Mankiw and Reis (2002) propose the sticky information model to generate a lagged inflation response to monetary shocks consistent with the empirical evidence. Their model is also successful to address the inflation persistence observed in the data. We conjecture that sticky information assumption could be helpful to resolve the 'persistence anomaly' of the real exchange rates. We show that hump-shaped inflation response result is sensitive to the assumptions on the monetary policy and price setting block of the model. Furthermore, the response of nominal exchange rate is quite large and it dissipates quickly after a monetary shock. The improvement obtained in the real exchange rate persistence by the lagged inflation response is dominated by the large and short-lived nominal exchange rate responses, therefore it is quantitatively small. For all alternative specifications, we find that sticky information and sticky price models produce similar moments. Chapter 3 investigates the degree of financial integration within and between European countries. We construct two measures of de-facto integration across European regions to capture 'diversification' and 'development finance' in the language of Obstfeld and Taylor (2005). We find evidence that capital market integration within the EU is less than what is implied by theoretical benchmarks and also less than what is found for U.S. states. We ask why is this the case? Using country-level data for economic institutions, we find that these are not able to explain differences between countries. Using regional data from the World Values Surveys, we investigate the effect of 'social capital' on financial integration among European regions. We find regions, where the level of confidence and trust is high, are more financially integrated with each other"--Page v-vi.