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This thesis consists of three essays on International Macroeconomics with labor market
frictions. The first chapter addresses the international co-movement of employment
by introducing labor market search frictions along with real wage rigidity into a
two-country economy. I show that search and matching frictions in the labor market,
combined with wage rigidity account for the positive cross-country correlation of
employment as well as labor market activity within a country. With search and
matching frictions in the labor market, higher productivity in the home country leads
home and foreign employment to rise even at the initial period before productivity
shocks spill over. When demand for foreign goods is predicted to rise, foreign firms
have an incentive to hire workers in advance in response to the higher expected payoff
to a job because hiring takes time and costs.
The second chapter examines a Ramsey-type optimal monetary policy in an open
economy with a two-country dynamic general equilibrium model where search and
matching frictions exist in labor markets along with the limited participation in financial
markets. Monetary policy affects the decision of firms in labor markets because firms
finance their wage bills with loans from domestic financial intermediaries in advance.
There are two main results associated with optimal monetary policy. The long-run
optimal nominal interest rate is zero suggesting deflation because the terms of trade
effect on consumption is weaker by search and matching frictions in the labor market.
As a result of the Ramsey optimal monetary policy, dynamics of business cycles in
both countries show similar patterns in response to productivity shocks and, in turn,
higher cross-country correlations of real variables.
In my third chapter, I explore how a country-specific productivity shock generates
deviations of the LOP in an open economy by introducing search frictions in labor
and goods markets. First, I express the LOP gap by the ratio of marginal utility of
aggregate search efforts across countries. Then I show that the LOP gap is expressed in
terms of relative aggregate consumption across countries by examining the relationship
between the aggregate search efforts and the aggregate consumption. I find that a country-specific productivity shock generates deviations of LOP through the link
between aggregate consumption and aggregate productivity.
If a country-specific productivity shock occurs in the home country, then households
in the home country exert more search efforts to consume more goods, which
entails the difference of matching probabilities of firms between the domestic and the
export markets. Since aggregate productivity and marginal costs of posting vacancies
are the same across markets, difference in matching probabilities between markets
let firms operating in each market offer different prices. Finally, I study responses of
macroeconomic variables to a positive productivity shock in the home economy. I
find the two-search model delivers consistent correlations with data, in terms of crosscountry
correlations of output and consumption, and a negative correlation between
the terms of trade and the relative output when taking into account productivity shocks
along with preference shocks. |
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