Essays on business cycles and monetary policy in emerging economies

This dissertation studies the nature of macroeconomic fluctuations and the optimal design of monetary policy in emerging economies.; Chapters one, "Business Cycle Accounting in Emerging Countries," evaluates the sources of economic fluctuations in Argentina, Brazil and Mexico during the 1990s. The model considers the following shocks: productivity, government spending, international interest rate, a labor wedge, a capital wedge and a bond wedge. Productivity and the labor wedge explains most of the fluctuations in output, however the relative importance of these factors differs across countries. In Argentina, business cycles are explained mainly by the labor wedge, while in Brazil and Mexico fluctuations are mostly driven by productivity shocks. These findings suggest that labor market rigidities must be taken into account in dynamic general equilibrium models in order to explain business cycles in emerging countries.; Chapter two, "Optimal Monetary Policy in a Small Open Economy under Segmented Asset Markets and Sticky Prices," studies optimal monetary policy in a two-sector small open economy model under segmented asset markets and sticky prices. We solve the Ramsey problem under full commitment, and characterize the optimal monetary policy in a version of the model calibrated to the Chilean economy. The contributions of the paper are twofold. First, under the optimal policy the volatility of non-tradable inflation is near zero. Second, stabilizing non-tradable inflation is optimal regardless of the financial structure of the small open economy.; Chapter three, "How Should Monetary Policy React to Foreign Interest Rate Shocks? A Quantitative Evaluation for Chile," analyzes the role of monetary policy to mitigate the negative effects of variations in the foreign interest rate. We estimate the monetary policy rule followed by the Central Bank of Chile, and compare its performance against three simple targeting rules: exchange rate peg, non-tradable inflation targeting, and CPI inflation targeting. In a dynamic two-sector model calibrated to the Chilean economy we find that the empirical monetary policy rule provides a higher level of welfare compared to the theoretical rules.