Essays on Monetary Policy and International Macroeconomics

Recent economic events pose challenging questions for macroeconomists. The rising global imbalances raise the issue whether existing international macroeconomic models can explain the patterns observed in the data on real exchange rates and current accounts. The first chapter of this dissertation addresses the question whether a standard portfolio balance model can account for the long-run dynamic behavior of the real exchange rate and net foreign debt in the United States (US). The rest of the dissertation does not test how well theoretical models fit reality but uses models in order to understand reality better. The second and third chapters are motivated by the most significant economic event in the last decade-the US 2008 financial crisis. It triggered a major collapse in US real activity, called the Great Recession, and disrupted the job matching process in the labor market. The second chapter of this dissertation addresses the challenges faced by monetary policymakers in response to an increase in labor market frictions. Two striking features of the Great Recession are the speed and synchronicity with which real activity collapsed across the world. The third chapter analyzes how shocks such as the 2008 crisis are transmitted across countries. The findings of each chapter are briefly summarized in the following paragraphs.A strand of models of the joint behavior of the current account, net foreign debt stock and the real exchange rate postulate that this behavior is driven by saddle-path dynamics and the related portfolio balance effect. This saddle-path dynamics is based on the assumption that domestic and foreign assets are imperfect substitutes and that the financial markets clear before the goods markets. Chapter 1 uses the Johansen test for cointegration to check the prediction of a portfolio balance model that the net foreign debt stock and real exchange rate display saddle path dynamics. Newly constructed quarterly series on the face value of the United