Macroeconomic policy in open economies

This dissertation consists of three essays that investigate how policy instruments commonly available to policymakers in open economies are interconnected and how their optimal use relate to features of the economy.Chapter 2 studies the implementation of official interventions in the foreign exchange market when policymakers allow exchange rates to float and have the simultaneous goals of microcosmic stabilization and foreign reserve accumulation. The model takes into account the connection between sterilized official interventions and monetary policy decisions, which is usually absent in the literature. Simulations indicate that under incomplete information the separation of monetary policy and intervention decisions allows a faster rate of accumulation of reserves, while the centralization of decisions permits faster learning by price setters about the target for inflation. This trade-off suggests that separation will only be a satisfactory strategy if achieving an adequate level of reserves is a sufficiently relevant policy goal. More importantly, the results illustrate the relevance of rather overlooked institutional features for the pursuit of adequate level of reserves.Chapter 3 is concerned with the optimal composition of public debt among three types of security---price indexed, nominal, and foreign currency debt---and its relation to central bank's behavior and to shocks. It shows how exactly the optimal shares of each type of security are determined by (1) the uncertainty about their real returns, (2) their ability to provide insurance against fluctuations of government expenditure and oscillations of the tax base, (3) central bank's behavior, and (4) the volatility of supply and demand shocks. It also discusses how the optimal composition is affected by changes in central bank's behavior and in the volatility of shocks.Chapter 4 focuses on the debate about the reasons for the high real interest rates practiced in Brazil in recent years. It tests the assertion that risks associated with the jurisdiction and currency inconvertibility are relevant determinants of real interest rates and finds no support for it. The results further indicate that monetary and fiscal factors are far more relevant to explain the level of real interest rates.